ANNUAL REPORT AND ACCOUNTS 2016 DELIVERING AGAINST OUR STRATEGY CONTENTS WHO WE ARE STRATEGIC REPORT We are a fast-moving consumer goods company with OVERVIEW Who We Are IFC great brands and great people. Our Corporate Brands 1 Our name may have changed but our strategy, our Performance Highlights 2 values and our focus on generating sustainable Chairman’s Statement 3 shareholder returns remain the same. STRATEGY How We Create Value 4 Consumers around the world enjoy our Growth and Key Performance Indicators 6 Specialist Brands. These are the key assets in our Our Brands and Markets 8 portfolio, quality brands delivering quality growth. Our Operating Environment 9 Chief Executive’s Statement 10 We also have strong corporate brands. From a tobacco Investment Case 12 perspective we have Imperial Tobacco, home to most PERFORMANCE of our international tobacco operations, ITG Brands in Operating Review 13 the USA and Tabacalera, our premium cigar business. Financial Review 17 Corporate Responsibility 20 Beyond tobacco we have Fontem Ventures, developing Risk Management 26 non-tobacco consumer experiences and currently Principal Risks and Uncertainties 28 focused on the growth of the blu e-vapour brand, and GOVERNANCE Logista, one of the largest distribution businesses Chairman’s Introduction 33 in Europe. Board of Directors 34 The Board and its Committees 36 The breadth of this brand focus is reflected in the Directors’ Report 44 name of our parent company: Imperial Brands Directors’ Remuneration Report 51 perfectly captures the business we are today. FINANCIAL STATEMENTS AND NOTES Independent Auditors’ Report 75 OUR VALUES Consolidated Income Statement 80 Consolidated Statement Our values express who we are and what we stand for, of Comprehensive Income 81 and capture the individual and collective behaviours Consolidated Balance Sheet 82 we expect from everyone who works for us. Consolidated Statement of Changes in Equity 83 We’re proud of our heritage and excited about Consolidated Cash Flow Statement 84 the future. Notes to the Financial Statements 85 Independent Auditors’ Report to the The success of our strategy, the strength of our brands Members of Imperial Brands PLC 120 and the talents of our people will continue to generate Imperial Brands PLC Balance Sheet 122 Imperial Brands PLC Statement of quality growth in the years ahead. Changes in Equity 122 Notes to the Financial Statements of Imperial Brands PLC 123 SUPPLEMENTARY INFORMATION We can I engage I own Related Undertakings 126 Shareholder Information 134

For a more interactive experience visit: www.imperialbrandsplc.com We surprise I am We enjoy

Keep up to date with our news via Twitter @ImperialBrands OUR CORPORATE BRANDS OVERVIEW STRATEGY PERFORMANCE GOVERNANCE FINANCIALS

OUR CONSUMER BRANDS

GROWTH BRANDS SPECIALIST BRANDS

www.imperialbrandsplc.com 1 PERFORMANCE HIGHLIGHTS

OUR PERFORMANCE

DIVIDEND PER SHARE ADJUSTED EARNINGS REPORTED EARNINGS PER SHARE 1,2 PER SHARE +10% +12% -62.7% 155.2p 249.6p 66.1p

GROWTH BRAND VOLUMES2 ADJUSTED REPORTED OPERATING PROFIT1 OPERATING PROFIT +4.3% +10.4% +12.1% 151bn £3.5bn £2.2bn

TOBACCO NET REVENUE1,2 CASH CONVERSION2

+9.7% £7.2bn 95%

ADJUSTED NET DEBT ADJUSTED NET (INCLUDES THE £2.3 BILLION DEBT REDUCTION IMPACT OF FOREIGN EXCHANGE) (AT CONSTANT CURRENCY) +£1.3bn 1. Changes in our adjusted results are presented on a constant currency basis. 2. KPIs used as bonus and LTIP performance criteria £12.9bn £1bn for Executive Directors. See Remuneration Report on page 51 for more information.

PERFORMANCE MEASURES

Measure Explanation Where used Reported (GAAP) Complies with International Financial Reporting Standards and the relevant legislation. Throughout the report. Adjusted Non-GAAP measures provide a useful comparison of performance from one period to the next. Throughout the report. (Non-GAAP) These measures are defined in the Accounting Policies on page 88. Constant Removes the effect of exchange rate movements on the translation of the results of our Throughout the report. currency basis overseas operations. Market share Market share data is presented as a 12 month moving average weighted across the markets in Throughout the report. which we operate. The list of markets used to compile the aggregate market share calculation has been changed for FY16 and prior periods have been restated for comparability. Stick equivalent Stick equivalent (SE) volumes reflect our combined cigarette, fine cut tobacco, cigar and Throughout the report. snus volumes.

2 Imperial Brands | Annual Report and Accounts 2016 CHAIRMAN’S STATEMENT OVERVIEW

The Board is pleased to be recommending a total dividend for the year of 155.2 pence per share, another strong increase of

10 per cent. This is the eighth consecutive STRATEGY year that we have delivered dividend growth of 10 per cent and we are committed to maintaining this annual growth rate over the medium term.

Operating Responsibly The responsible way we run our business is integral to our long-term sustainability. PERFORMANCE We take pride in doing things the right Mark Williamson way, living our values and adhering to our Chairman Code of Conduct.

We support community initiatives across our market footprint, provide employment I’m delighted to welcome you to the first Annual Report and for more than 30,000 people around the Accounts of Imperial Brands. world and return around £17 billion a year

to governments in taxes. GOVERNANCE

Our name may have changed but our strategy and values Governance and the Board remain the same. We continue to run a responsible and Imperial Brands continues to be run in an open and transparent manner. You successful business that’s focused on maximising can find out more about our governance sustainable returns for our shareholders. framework and the work of the Board and its Committees in the Governance Report.

We added to our long track record of delivery with another strong performance in 2016. The composition of the Board changed FINANCIALS The excellent results we delivered from ITG Brands in the USA were a particular during the year. Non-Executive Director highlight, as we continued to build on our enhanced position following last year’s Ken Burnett stepped down in February acquisition of brands and other assets. after completing nine years’ service and I would like to thank him for the As well as driving our operational performance we also made further progress with considerable contribution he made to our transition initiatives, which continue to strengthen the business and improve our our success. quality of growth. Following Ken’s departure we appointed None of our achievements would be possible without the energy and commitment two independent Non-Executive Directors, of our people. Employees across the Imperial Brands family have worked tirelessly Steven Stanbrook in February and Therese to deliver these results and I would like to thank them all for their commitment Esperdy in July. and support. Between them they have held many Imperial Brands senior executive roles over the years, Shareholders voted overwhelmingly in favour of changing the name of our parent Steven at a number of FMCG companies company from Imperial Tobacco Group PLC to Imperial Brands PLC at our Annual including SC Johnson & Sons Inc, and General Meeting in February. Therese in the banking sector, most The rationale for change was simple; Imperial Brands better reflects the brand-focused notably at JP Morgan. business we now are. Both have extensive international Consumers know us for our Growth and Specialist Brands, the key assets in our portfolio. experience, including in the USA, and are These are quality brands, delivering quality growth and we continue to build the proving to be great additions to the Board. contribution they make to our volumes and revenues. Delivering Strong Results We also have strong corporate brands: Imperial Tobacco, home to most of our worldwide 2016 was another strong year of delivery tobacco operations, ITG Brands in the USA, our international premium cigar business for the business and we look to the future Tabacalera, our non-tobacco subsidiary Fontem Ventures and our European distribution with confidence. business Logista. We have the right strategy, the right The breadth of this brand focus is reflected in our new name and marks an exciting brands and the right people, and that puts new chapter in our growth story. us in a strong position to create further value for shareholders over the Enhancing Shareholder Returns coming years. The consistent execution of our strategy continues to create value by maximising sales, cost and cash opportunities.

On a constant currency basis tobacco net revenue was up 9.7 per cent, adjusted operating profit was up 10.4 per cent and we grew adjusted earnings per share by 12.0 per cent.

Mark Williamson Chairman

www.imperialbrandsplc.com 3 HOW WE CREATE VALUE

OUR STRATEGY AND BUSINESS MODEL

STRATEGY

Our strategy is focused on maximising sales, cost and cash opportunities to deliver sustainable shareholder returns. Building the contribution of our Growth and Specialist Brands is improving our quality of growth, while prioritising share and profit delivery in markets is key to driving performance across our balanced geographic footprint. Cost optimisation continues to enhance efficiencies and by embedding stronger capital discipline we are more effectively managing working capital and achieving high cash conversion.

MAXIMISING SHAREHOLDER RETURNS

STRENGTHEN DEVELOP COST CAPITAL PORTFOLIO FOOTPRINT OPTIMISATION DISCIPLINE

HOW WE SUPPORT GROWTH

Strong Governance Managing Risk High standards of governance are We actively identify, manage and critical to our success. mitigate the risks facing our business.

Turn to page 33 Turn to page 26 for more information for more information

Acting Responsibly Rewarding Success Operating responsibly is integral Our people are rewarded fairly and to the way we do business. incentivised to deliver our strategy.

Turn to page 20 Turn to page 51 for more information for more information

4 Imperial Brands | Annual Report and Accounts 2016 OVERVIEW STRATEGY BUSINESS MODEL

Our business model illustrates how we create value. Consistently applying our Sales Growth Drivers to our Growth and Specialist Brands, combined with effective cost management, delivers quality sales with

high operating margins. This generates the strong cash flows that are PERFORMANCE a recognised strength of our business. We use this cash to reinvest to support growth, pay down debt or return to shareholders through dividends, which we are committed to growing by at least 10 per cent a year over the medium term. GOVERNANCE

HIGH MARGIN PROFITS FINANCIALS

S R E V I R

D STRONG H GROWTH AND

T STRONG

W SPECIALIST DIVIDEND

O CASH FLOW

R

G BRANDS

GROWTH

S

E

L

A S

REINVEST

SALES GROWTH DRIVERS

Portfolio management, innovation, customer engagement and pricing are the four Sales Growth Drivers we have selected to drive the performance of our Growth and Specialist Brands. Through portfolio management we focus on connecting our brands with consumers to enhance brand equity and build sales. For us, innovation means creating a drumbeat of initiatives: small, frequent innovations that keep our brands fresh and relevant. Excellence in customer engagement requires strong partnerships with retailers that support their business and maximise the impact of our brands at the point of sale. Pricing opportunities are evaluated by brand, pack size and sales channel. We assess excise structures when making pricing decisions and focus on driving revenue growth while continuing to give consumers value for money.

www.imperialbrandsplc.com 5 KEY PERFORMANCE INDICATORS

HOW WE MEASURE OUR PERFORMANCE

We use key performance indicators and the supporting metrics in the Operating Review to measure the progress we make in delivering our strategy. These measures reflect our priorities and are used to monitor and drive business performance.

Return on Invested Capital (%) Adjusted Earnings Per Share1 (pence)

2016 13.9 2016 249.6

2015 11.0 2015 212.5

2014 14.2 2014 203.4

Performance Performance Return on invested capital increased as we benefited Reported adjusted earnings per share rose by from a full year return on our USA acquisition. 17.5 per cent. On a constant currency basis the increase was 12 per cent. Definition Return on invested capital measures the effectiveness of Definition capital allocation and is calculated by dividing adjusted Adjusted earnings per share represents adjusted profit net operating profit after tax by invested capital. Invested after tax attributable to the equity holders of the capital is reported equity adding back amortisation of Company divided by the weighted average number of intangibles and adjusting back to foreign exchange rates shares in issue during the period, excluding shares held at the time of relevant acquisitions. to satisfy employee share plans and shares purchased by the Company and held as treasury shares.

MAXIMISING SHAREHOLDER RETURNS

STRENGTHEN PORTFOLIO DEVELOP FOOTPRINT

Growth Brand Volumes1 (bn) Tobacco Net Revenue1 (£bn)

2016 151 2016 7.2

2015 145 2015 6.3

2014 131 2014 6.4

Performance Performance Our Growth Brands outperformed market trends, with Tobacco net revenue was up 9.7 per cent at constant volumes up 4.3 per cent compared with market declines currency and increased 14.7 per cent at actual rates. of 0.9 per cent. Excluding Iraq and Syria, volumes were Definition up 7.8 per cent. Tobacco net revenue comprises tobacco and Fontem Definition Ventures revenue less duty and similar items, excluding Volumes are measured on a stick equivalent basis to peripheral products. reflect combined cigarette and fine cut tobacco volumes.

6 Imperial Brands | Annual Report and Accounts 2016 OVERVIEW STRATEGY

1. KPIs used as bonus and LTIP performance criteria for Executive Directors. See Remuneration Report on page 51 for more information. PERFORMANCE Dividend Per Share (pence) Total Shareholder Return1

320 Imperial Brands 2016 155.2 285 FTSE 100 2015 141.0 250 215 2014 128.1 180 145 GOVERNANCE Performance 110 Dividend per share increased by 10 per cent for the 75 eighth consecutive year. 2012 2013 2014 2015 2016

Definition Performance Dividend per share represents the total annual dividends In 2016 we outperformed the FTSE 100 by 2.8 per cent. being the sum of the paid interim dividend and the With dividends reinvested, £100 invested in Imperial proposed final dividend for the financial year. Brands five years ago would now be worth £228.49

compared with £161.98 if invested in the FTSE 100 index. FINANCIALS

Definition Total shareholder return is the total investment gain to shareholders resulting from the movement in the share price and assuming dividends are immediately reinvested in shares.

MAXIMISING SHAREHOLDER RETURNS

COST OPTIMISATION CAPITAL DISCIPLINE

Tobacco Operating Margin (%) Cash Conversion Rate1 (%)

2016 46.9 2016 95

2015 46.3 2015 97

2014 43.7 2014 91

Performance Performance Tobacco operating margin increased by 60 basis points Our continued focus on cash generation and working to 46.9 per cent. capital management delivered cash conversion of 95 per cent. Definition Tobacco adjusted operating profit divided by tobacco net Definition revenue expressed as a percentage. Cash conversion is calculated as cash flow from operations before interest and tax payments less net capital expenditure relating to property, plant and equipment, software and intellectual property rights as a percentage of adjusted operating profit.

www.imperialbrandsplc.com 7 OUR BRANDS AND MARKETS

We focus on maximising opportunities for our brands and markets by Turn to page 13 building the contribution from our Growth and Specialist Brands and for more information strategically managing our markets to deliver either Growth or Returns.

GROWTH BRANDS

Growth Brands have broad consumer 45.6% appeal and are managed to drive quality sustainable growth.

SPECIALIST BRANDS

Specialist Brands appeal to specific TOBACCO NET consumer groups and have a track record REVENUE BY BRAND of generating strong returns. 14.5%

PORTFOLIO BRANDS

Some Portfolio Brands support our volume and revenue development, while others are 39.9% delisted or migrated into Growth Brands.

GROWTH MARKETS

21.9% In Growth Markets we aim to deliver long-term share and profit growth.

TOBACCO NET USA MARKET REVENUE BY MARKET We have a significant presence in the USA 20.6% and therefore manage it as a standalone Growth Market.

57.5%

RETURNS MARKETS

In Returns Markets we focus on sustainable profit delivery, while actively managing our large share positions.

8 Imperial Brands | Annual Report and Accounts 2016 OUR OPERATING ENVIRONMENT OVERVIEW

More than 5,000 billion cigarettes are sold in markets around the world every year. Our operations extend across a broad spread of these markets, providing us with a balanced geographic footprint that supports our drive to deliver sustainable shareholder returns. STRATEGY

OUR GEOGRAPHIC FOOTPRINT The EUTPD has been significantly revised We apply stringent controls to our global to cover the appearance, production and network of distributors and have a Our markets are clustered to generate taste of tobacco and e-cigarettes. dedicated team of specialists who work either Growth or Returns. with governments and law enforcement The revised Directive came into force Growth Markets have large profit and/or agencies around the world to tackle in May 2014 and EU Member States had volume pools and include selected illicit trade. PERFORMANCE until 20 May 2016 to transpose it into countries in the EU, Eastern Europe, national law. We also invest in systems and processes Asia, the Middle East and the USA. to improve the security of our products From that date on, all tobacco products We typically have shares below 15 per cent and share intelligence to help disrupt manufactured in the EU have had to in Growth Markets and aim to deliver both the supply of illegal cigarettes. comply with the revised Directive, although share and profit growth. there are provisions for the sell-through of In Returns Markets, which include old stock which vary from Member State to E-VAPOUR PRODUCTS

Australia and markets in the EU, Eastern Member State. The global market for e-vapour products GOVERNANCE Europe and Africa, we have larger positions (EVPs) continues to expand and there is During the year, the FDA extended its and focus on generating sustainable profit, growing consensus that these products authority to include the regulation of while actively managing our market share. may be less risky than smoking tobacco. e-cigarettes and cigars and other The macro-economic environment tobacco products. E-cigarettes are the most common EVPs continues to impact consumer spending and we are represented in this category by We support reasonable, proportionate and and legitimate cigarette sales in some blu, one of the world’s leading high quality evidence-based regulation that respects territories. Political instability in many EVP brands. adult freedom of choice and recognises parts of the world, particularly in the FINANCIALS that tobacco products are enjoyed by The blu brand is managed by our non- Middle East, combined with the UK’s millions of people worldwide. tobacco subsidiary Fontem Ventures and decision to leave the EU, creates further has an established position in the USA and challenges and uncertainty. We oppose attempts to exclude us from the UK and a growing presence in France regulatory debates and continue to raise However, the strength of our strategy has and Italy. Between them, these four concerns about the impact of extreme enabled us to consistently develop our markets account for over 70 per cent regulation, such as plain packaging or business in difficult conditions and we of global e-vapour sales. high excise increases, which often fuel see considerable opportunities for driving the growth of illicit trade. As well as building sales of blu, Fontem quality growth in the years ahead. also continues to focus on developing ILLICIT TRADE OF TOBACCO advanced technologies to improve the REGULATING TOBACCO consumer vaping experience, which is Every year around 500 billion illegal Regulation is increasing, as are the costs of important for the future growth of the cigarettes are consumed, depriving compliance – particularly in the EU and EVP category. governments of around £30 billion in taxes. the USA. The regulation of EVPs continues to evolve. The smuggling and counterfeiting of Regulation is largely driven by three We believe a clear regulatory framework to tobacco has considerably wider impacts: organisations: the World Health Organization govern the way these products are made children can more easily obtain cigarettes, (WHO, through the Framework Convention and sold is required, and we continue to consumers are deprived of the quality they on Tobacco Control, the FCTC), the USA’s engage with key stakeholders to support associate with their favourite brands and Food and Drug Administration (FDA) and the development of effective legislation. the livelihoods of independent retailers the European Commission (through the are threatened. European Union Tobacco Products Directive, the EUTPD).

www.imperialbrandsplc.comwww.imperialbrandsplc.com 9 CHIEF EXECUTIVE’S STATEMENT

In simplifying our portfolio we are reducing complexity and cost, which reflects our approach to developing new ways of working: everything needs to be simpler and more effective than before. This is providing greater clarity on roles and responsibilities, enabling our people to prioritise and focus on work that really matters to our success.

Opportunities to enhance the way we work are identified through the continual refinement of our operating model, which involves looking at how we can change systems, processes and structures to improve performance. Alison Cooper In 2016 we focused on improving sales and Chief Executive marketing processes across 58 markets and

we launched a new Customer Relationship This was another year of strong value creation and I’d like Management solution in 19 markets. We also transitioned to a single global HR platform to thank our people across the business for all their hard and introduced shared services in Finance work and dedication. Their focus on driving quality growth, in a number of markets. embracing new ways of working and effectively managing Strengthening our Portfolio cost and cash has been integral to our success. Our drive to improve our quality of growth was reflected in the excellent results we Consistently delivering against our strategy has been a hallmark of our performance in recent achieved with our Growth Brands. years and is enabling us to build a stronger, higher quality business with even greater capacity Growth Brands outperformed the market, for generating sustainable shareholder returns. with strong growth in volumes, share and Highlights in the year included further enhancing the contribution from our Growth and net revenue. Specialist Brands, which now account for 60.1 per cent of the Group’s tobacco net revenue. Growth Brands continue to benefit We also made excellent progress in the USA, with ITG Brands performing strongly in from migrations, with multiple markets line with our plans. successfully migrating Portfolio Brands Elsewhere, we maintained good momentum across our market footprint, with results in to JPS, West and Parker & Simpson. Growth Markets also benefiting from revenue growth from Fontem Ventures. We further We also further invested in building brand emphasised our focus on quality revenue by prioritising investment in brands and markets equity with marketing campaigns for JPS, that offer the best returns. West, Davidoff and Gauloises Blondes. Our strong financials were characterised by another year of adjusted earnings per share and The excellent progress we are making dividend growth. On a constant currency basis adjusted operating profit was up by 10.4 per with our Growth Brands was supported cent and we grew adjusted earnings per share by 12.0 per cent. Return on invested capital by strong results from our Specialist Brands, improved to 13.9 per cent and we increased the dividend by 10 per cent for the eighth which account for almost 15 per cent of consecutive year. our tobacco net revenue. Net revenue increased by 44 per cent, benefiting from Delivering Sustainable Quality Growth the contribution of the Kool and blu brands Our strategic transition has created a stronger business that is generating a higher quality which we acquired last year. of growth. Like many businesses, we operate in a challenging, volatile environment and the companies that are successful in these conditions are the ones that adapt and change. In Fontem Ventures recent years we’ve taken decisive action to improve our results and our ways of working, blu is a high quality e-vapour brand that is and our focus on optimising our brand portfolio has been at the heart of our change agenda. proving to be a tremendous addition to our Our portfolio consists of Growth, Specialist and Portfolio Brands. Growth Brands have strong portfolio. blu is managed by our non-tobacco equity and broad consumer appeal; Specialist Brands also enjoy strong equity but typically subsidiary Fontem Ventures, which is focused appeal to more specific consumer groups. Our priority is to build the contribution these brands on developing new consumer experiences make to our results. Portfolio Brands are a mix of local and regional offerings. Those with and opportunities for sustainable revenue strong equity support our volume and revenue progression, while weaker brands are delisted growth. Fontem’s current priority is to or migrated into higher quality Growth Brands. capitalise on the growth in the e-vapour sector by building sales of blu and licensing a range We have a very high success rate when it comes to these migrations, with over 95 per cent of patented technologies. of consumers completing the transition from one brand to another. During the year we completed 17 additional brand migrations across multiple markets. A total of 49 migrations blu sales are currently concentrated in the have now been completed and another 15 are in progress. USA, UK, France and Italy, the four core e-vapour markets that together account for We have identified significant opportunities to further simplify our brands and products and around 70 per cent of global e-vapour sales. we will start driving this next phase of portfolio optimisation in 2017.

10 Imperial Brands Brands PLC| Annual | Annual Report Report andand Accounts 2016 2016 OVERVIEW

blu is the established number two brand in Cost Optimisation and Capital Discipline Outlook the UK and USA and has a growing presence Our current cost optimisation programme We have a track record of consistently in France and Italy. remains on track to save £300 million per delivering against our strategy, which has

annum from September 2018. A range of generated significant returns to shareholders STRATEGY We are investing to support growth, funding initiatives have been successfully deployed and created a strong platform for future brand equity building with a new marketing to optimise our cost base, realising £65 value creation. campaign in the USA and UK, and allocating million in the year, and bringing the total To further drive delivery of our strategic additional funds for technological research annualised savings to £240 million. and development to continue to improve priorities and underpin revenue growth the blu vaping experience. During the year Our commitment to capital discipline over the medium term, we will invest an Fontem further enhanced revenues by underpins our focus on cash generation additional £300 million, which, net of licensing its first generation technology and the effective management of our investment returns, will have a £200 million to a number of other e-vapour companies. working capital. impact in 2017. This will be partly offset by PERFORMANCE £90 million of cost optimisation savings Cash conversion remained strong at resulting in a 4 per cent net impact on 2017 Developing our Footprint 95 per cent compared to 97 per cent last year, constant currency earnings. However, Our excellent Growth and Specialist Brand which benefited from one-off working capital foreign exchange translation is expected to performances were complemented by good benefits associated with the US acquisition. benefit earnings by around 14 per cent based results across our geographic footprint. We reduced adjusted net debt by £1.0 billion, on current rates, and supports the continued excluding the adverse impact of currency We delivered a positive revenue and profit delivery of our financial targets in 2017. performance in Growth Markets, with the translation, taking the total reduction over GOVERNANCE benefit of additional revenue from blu and the last two years to £2.1 billion. The phasing of the increased investment will be biased to the early part of 2017, resulting in royalties from the licensing of Fontem’s For the eighth consecutive year we delivered lower revenue and profit in the first half, technology and good results in Italy, Russia, strong dividend growth of 10 per cent and we offset by a stronger second half performance. Japan and Taiwan more than offsetting remain committed to continuing to grow the declines caused by Iraq and Syria. dividend by at least 10 per cent a year over We intend to sustain an increased level of The integration of our US operations was the medium term. investment in subsequent years and we completed as planned during the year and expect a return to constant currency ITG Brands continued to perform strongly. The Next Decade of Growth earnings growth in line with our medium- FINANCIALS We are investing to support growth, funded During the year, I spent time with the Board term guidance of 4-8 per cent from the 2018 by the acquisition synergies, to drive and my senior leadership team reviewing financial year. our strategy for creating shareholder value long-term sustainable value. These We continue to prioritise capital discipline over the next 10 years. prioritised investments have driven steady and strong cash conversion to underpin our improvements in the market shares of This reinforced the strength of our strategy commitment to deliver dividend growth of Winston and Kool. Towards the end of the and highlighted opportunities to drive even at least 10 per cent next year and over the year we also launched a new pack design greater focus on our strategic priorities: medium term. for Winston, coupled with a new advertising strengthening our portfolio, developing We have a strong track record of delivering campaign, to further build brand equity. We our footprint, optimising our cost base sustainable shareholder returns over many also significantly improved the performance and embedding capital discipline. of our mass market cigar business as we years and we are well-placed to build on this changed our route to market to a retail To support the delivery of further quality in 2017 and over the next decade. revenue growth in 2017 and subsequent focused business model, aligning it with our cigarette business. years we will invest an additional £300 million in our Growth and Specialist In Returns Markets we focused on improving Brands in the key markets that offer the our quality of growth by making investment best opportunities for quality growth. choices to underpin long-term sustainable Alison Cooper profit growth. We have actively directed Investments will be prioritised and focused Chief Executive investment into markets where we see the on areas where we have a proven track best returns and avoided low quality or record of generating quality revenue unprofitable volume. We achieved good growth, including brand building, customer results in Germany, Australia and Algeria, engagement and sales execution. and continued to invest in the UK to defend This increased investment will be supported our position in an extremely competitive by a new phase of cost optimisation, which environment. will deliver additional savings of £300 million Good Results from Logista per annum by 2020, at a cost of £750 million. Our European distribution business Logista has a history of delivering good results and These savings will be generated by 2016 was no exception. Distribution fees and implementing further initiatives to reduce adjusted operating profit both increased and complexity and drive operational efficiencies. the Logista team continues to focus on cost management and new growth opportunities to further drive the profitable development of the business.

Imperial Brands PLC | Annualwww.imperialbrandsplc.com Report and Accounts 2016 11 INVESTMENT CASE

WHY INVEST IN IMPERIAL BRANDS? Investing for Quality Growth Value Creation Through New Ways of Working Imperial Brands has an attractive portfolio of brands and markets Our strategic agenda is changing the way we operate to strengthen which can deliver long-term profitable growth. the business and improve our quality of growth.

Our strategy is to strengthen our tobacco and non-tobacco portfolio Simplification and focus are at the heart of our new ways of working, by generating an increasing proportion of revenue from our strongest as we reduce complexity and instil a more cost-conscious culture. We brands, while also prioritising our investment in those markets that are also adopting lean principles through continuous improvement in offer the best returns. everything we do.

We have a proven track record of achieving strong price/mix growth This provides opportunities to reduce costs, improve effectiveness to offset industry volume declines and enhance profitability. We are and create a more agile organisation that can drive consistent also investing in non-tobacco products and experiences through our returns for shareholders in an ever changing world. subsidiary, Fontem Ventures, to deliver future growth opportunities alongside our tobacco business.

INVESTING FOR QUALITY GROWTH; VALUE CREATION SUPPORTED BRANDS, PRODUCTS AND MARKETS WITH BY NEW AND IMPROVED WAYS LONG-TERM PROFIT POTENTIAL OF WORKING

10% DIVIDEND GROWTH PA 95% CASH CONVERSION OVER MEDIUM TERM

Strong Cash Generation Annual 10% Dividend Growth Over Medium Term Our business generates strong cash flows as a result of our A core part of our investment proposition is our commitment intrinsically high operating profit margins, coupled with our ability to grow the dividend by at least 10 per cent per annum over the to convert a very high proportion of these profits to cash. medium term. This is a commitment we have now achieved for eight consecutive years. Over recent years we have improved our cash conversion by reducing our working capital and prioritising our investments more Our ability to improve profitability and generate strong cash effectively. Our current focus for our cash resources are: investment flows will enable us to continue to deliver this income growth in our priority brands and markets, supporting double digit dividend to our shareholders. growth for shareholders and reducing our net debt.

12 Imperial Brands Brands PLC| Annual | Annual Report Report and and Accounts Accounts 2016 2016 OPERATING REVIEW OVERVIEW

We drive the performance of our brands and markets to deliver quality growth. Our markets prioritise either Growth or Returns, depending on their strategic role, and our portfolio focus is on maximising opportunities for our Growth and Specialist Brands. STRATEGY

BRAND PERFORMANCES We delivered excellent performances from our Growth and Specialist Brands. These are the most important assets in our portfolio and together they account for 60.1 per cent of our tobacco net revenue, up 320 basis points on last year, reflecting the improving quality of growth that we are consistently delivering. The rest of our portfolio consists of Portfolio Brands, which are local and regional brands that fulfil a variety of roles. Some add to our revenue momentum, while others will create more value by being migrated into Growth Brands.

Total Group tobacco volumes were 276.5 billion stick equivalents (2015: 285.1 billion), which includes an incremental 12.1 billion from our USA PERFORMANCE acquisition. Volumes were down 3.0 per cent, reflecting declines in Iraq and Syria and lower organic volumes, which offset the benefit of the contribution from ITG Brands.

GROWTH BRANDS Full Year Result Change Constant 2016 2015 Actual Currency Market share % 7.2 R +50bps 7.7 GOVERNANCE Net revenue £m 3,265 2,862 +14.1% +10.1% Percentage of Group volumes % 54.7 50.9 +380bps Percentage of tobacco net revenue % 45.6 45.8 -20bps

As a result of the USA acquisition our Growth and Specialist Brands were reclassified, effective 1 October 2015. USA Gold was replaced by Winston as a Growth Brand, and instead became a Portfolio Brand, and Kool and blu joined our Specialist Brands. With the exception of market share, prior year comparatives have not been adjusted for this reclassification. R See Performance Measures table on page 2.

Our Growth Brands are: Davidoff, Gauloises Blondes, JPS, West, Fine, News, Winston, Bastos, Lambert & Butler and Parker & Simpson. These are FINANCIALS quality brands with broad consumer appeal that are generating an increasing amount of our volume and revenue.

Growth Brands outperformed the market in the year, with volumes growing 4.3 per cent, against a backdrop of market volume declines in our geographic footprint of 0.9 per cent. We also grew Growth Brands net revenue by 10.1 per cent.

Excluding Iraq and Syria, underlying Growth Brand volumes increased by 7.8 per cent and underlying net revenue increased by 11.2 per cent.

We improved the share of Growth Brands from 7.2 per cent to 7.7 per cent. As part of our drive to prioritise Growth Brands and improve the quality of our growth we deliberately ceded some share in lower value Portfolio Brands, contributing to a 60 basis point decline in the Group share to 13.9 per cent.

Growth Brands now account for 54.7 per cent of total Group tobacco volumes, an increase of 380 basis points, and 45.6 per cent of overall tobacco net revenue, a decrease of 20 basis points.

Brand Chassis Highlights

JPF (JPS, Parker & Share growth in the chassis was driven by JPS and Parker & Simpson with the continued strength of JPS in Australia and Simpson and Fine) Players in the UK, as well as the ongoing success of brand migrations in a number of markets including Russia where we migrated Balkan Star. In Germany we took action to strengthen our share with the launch of larger JPS pack formats.

West (West, L&B, In Germany we migrated Route 66 into West and continued to grow West share in Saudi Arabia and Japan. Successful News and Bastos) brand migrations in France have supported the growth of News and in the UK another good performance from Lambert & Butler was helped by growth in crushball.

Winston The success of our new retailer contracts and promotional support is underpinning Winston’s good results and consistent share growth. A rejuvenated pack design and new consumer marketing is further enhancing brand equity.

Davidoff We delivered further share growth in Greece and maintained Davidoff’s share position in Taiwan’s premium segment with the launch of Davidoff Absolute. We also introduced Fresh Box formats in key Middle East markets, such as Saudi Arabia.

Gauloises A successful brand campaign supported good results in Germany. An excellent performance in Algeria, supported by the launch of Gauloises L’Autre, consolidated the brand’s market leading position. These positive performances more than offset the impact of Iraq and Syria.

Imperial Brands PLCwww.imperialbrandsplc.com | Annual Report and Accounts 2016 13 OPERATING REVIEW CONTINUED

SPECIALIST BRANDS Full Year Result Change Constant 2016 2015 Actual Currency Net revenue £m 1,042 693 +50.2% +43.6% Percentage of tobacco net revenue % 14.5 11.1 +340bps

Specialist Brands appeal to specific consumer groups and include: blu (e-vapour), Style, Gitanes, Kool (cigarettes), Golden Virginia, Drum, Route 66 (fine cut tobacco), Cohiba, Montecristo, Romeo Y Julieta (premium cigars), Backwoods (cigars), Skruf (snus) and Rizla (papers).

We achieved great results with our Specialist Brands, reflected in very strong net revenue growth, enhanced by contributions from blu, Kool and Backwoods. There was also good growth from Skruf in Scandinavia and premium cigars in the USA. This more than offset the impact of Iraq and Syria, which held back Gitanes. Specialist Brands now represent a greater proportion of the business at 14.5 per cent of net revenue.

MARKET PERFORMANCES We divide our footprint into Growth Markets, the USA Market and Returns Markets. We manage these markets based on their strategic roles, with Growth Markets and the USA Market prioritising long-term share and profit growth. In Returns Markets the focus is on sustainable profit delivery and effective management of our strong share positions.

GROWTH MARKETS Full Year Result Change Constant 2016 2015 Actual Currency Market share % 6.4 6.9 R -50bps Net revenue £m 1,568 1,449 +8.2% +4.3% Adjusted operating profit £m 443 409 +8.3% +2.2% Growth Brand % of net revenue % 47.2 47.0 +20bps Growth Brand volume bn SE 46.0 46.4 -0.8%

R See Performance Measures table on page 2.

We continued to build good momentum in Growth Markets, increasing net revenue by 4.3 per cent and adjusted operating profit by 2.2 per cent. This growth reflected an enhanced contribution from blu, the benefit of intellectual property royalties from Fontem Ventures and rising profits in key markets, offsetting increased investment in blu, transaction currency costs and the impact of Iraq and Syria.

Our overall market share decline was mainly driven by Maxim’s price disadvantage in Russia in the first half. We addressed this and delivered a stronger second half performance, stabilising our share in the process.

Excluding Iraq and Syria, underlying net revenue was up 8.0 per cent and adjusted operating profit was up 8.7 per cent. We increased the proportion of net revenue generated by Growth Brands by 20 basis points.

Country Performance

Russia Strong pricing during the year offset share declines and supported revenue growth. Our Growth Brands achieved excellent results with growth from West and the successful launch of Parker & Simpson.

Saudi Arabia Our share was up as we delivered consistent growth in West, with recent excise changes benefiting the lower price segment of the market. The recent launch of the Fresh Box format supported the performance of Davidoff.

Italy We increased our share in Italy, driven by a continued strong performance with JPS.

Greece We delivered further share growth in Davidoff to maintain the brand’s positive momentum.

Sweden and Norway We delivered good share and revenue growth in both Sweden and Norway, against a backdrop of positive pricing and a growing snus market.

Turkey We improved profitability after restructuring our operations and continued to progress a focused growth strategy with Davidoff and West in key cities. Recent positive pricing has supported revenue growth.

Japan We grew revenue and the share of West as we continued to invest in expanding our retailer coverage.

Taiwan We generated further profit growth, driven by the success of Davidoff equity activations and positive pricing, although our overall market share was down as the premium segment declined.

Iraq and Syria Continued instability in the region held back trading particularly in Gauloises and Gitanes in the first half.

14 Imperial Brands Brands PLC| Annual | Annual Report Report andand Accounts 2016 2016 OVERVIEW

USA MARKET Full Year Result Change Constant 2016 2015 Actual Currency STRATEGY Market share % 9.2 Net revenue £m 1,477 707 +108.9% +92.9% Adjusted operating profit £m 823 375 +119.5% +102.4% Growth Brand % of net revenue % 18.6 13.7 +490 bps Growth Brand volume bn SE 6.1 3.1 +99.4 %

Group revenue and profit benefited significantly from the contribution from ITG Brands following the acquisition of assets from Reynolds

American last year. The incremental contribution of the acquisition to the USA performance in the current financial year was tobacco net PERFORMANCE revenue of £682 million and volumes of 12.1 billion. Our total USA volumes for the year were 24.9 billion stick equivalents.

Adjusted operating profit more than doubled with the benefit of the acquisition. Adjusted operating margins improved 270 basis points to 55.7 per cent, despite increased brand investment.

The percentage of tobacco net revenue generated by Growth Brands increased to 18.6 per cent, as we reshaped our portfolio following the acquisition. From 1 October 2015, we reclassified our Growth and Specialist Brands, replacing USA Gold with Winston in Growth Brands and adding Kool to our Specialist Brands. USA Gold is now a Portfolio Brand.

Around 165,000 stores, representing around 90 per cent of USA cigarette volumes, have signed up to our new retailer agreements. These GOVERNANCE agreements support our new promotional arrangements, which have already delivered steady improvements in the market shares of Winston and Kool, almost offsetting the declines from our Portfolio Brands. Towards the end of the year we also launched a new pack design for Winston, coupled with a new advertising campaign, to further build brand equity.

Growth Brand volume benefited from the replacement of USA Gold with Winston, as did the percentage of net revenue generated by Growth Brands.

In addition, the action we have taken to improve our mass market cigar business, which includes the Dutch Masters and Backwoods brands, continued to strengthen our results. FINANCIALS RETURNS MARKETS Full Year Result Change Constant 2016 2015 Actual Currency Market share % 26.1 27.0 R -90bps Net revenue £m 4,122 4,095 +0.7% -2.7% Net revenue per ‘000 SE £ 23.51 22.08 +6.5% +2.9% Adjusted operating profit £m 2,094 2,111 -0.8% -4.3% Growth Brand % of net revenue % 54.6 50.9 +370bps

R See Performance Measures table on page 2.

Our priority in our Returns Markets is to maximise profit while managing our share.

We grew net revenue per thousand stick equivalents by 2.9 per cent and further improved the quality of our portfolio with Growth Brands now generating 54.6 per cent of tobacco net revenue, an increase of 370 basis points.

Against a backdrop of flat industry volumes, our market share declined by 90 basis points to 26.1 per cent. Net revenue was also down. Results were impacted by share declines in Returns North, particularly Ukraine, the UK and Germany, offsetting the share growth we delivered in Returns South, particularly in Algeria.

Adjusted operating profit was down 4.3 per cent, impacted by the conclusion of the distribution contract for Philip Morris International in the UK and Morocco, adverse transaction exchange and the cost of complying with EUTPD legislation.

Excluding these impacts, adjusted operating profit for Returns Markets overall grew 0.9 per cent, with Returns North flat and Returns South up 3.1 per cent.

Imperial Brands PLCwww.imperialbrandsplc.com | Annual Report and Accounts 2016 15 OPERATING REVIEW CONTINUED

RETURNS MARKETS NORTH Full Year Result Change Constant 2016 2015 Actual Currency Market share % 24.0 25.6 R -160bps Net revenue £m 2,645 2,649 -0.2% -2.6% Net revenue per ‘000 SE £ 28.01 25.76 +8.7% +6.1% Adjusted operating profit £m 1,439 1,475 -2.4% -5.1% Growth Brand % of net revenue % 57.2 53.6 +360 bps

R See Performance Measures table on page 2.

We made good progress in improving our quality of growth in Returns Markets North, increasing net revenue per thousand stick equivalents by 6.1 per cent. Growth Brands delivered 57.2 per cent of tobacco net revenue, up from 53.6 per cent.

We made a strategic decision to lower investment in Ukraine and Azerbaijan, where economic conditions and competitor discounting resulted in reduced profit opportunities. Overall profitability in Returns North was affected by the same factors outlined in the Returns Markets overview.

Country Performance

UK Our overall share declined, although we continued to invest to defend our position. Our fine cut tobacco share increased during the year, led by good growth from Gold Leaf, and we also grew sales of Rizla. In cigarette we generated positive momentum with JPS, Players and Lambert & Butler crushball variants, although investment to grow our share in the sub-economy segment impacted revenue and profit.

Germany Growth in revenue and profit was supported by stable market size and the continued positive performance from Gauloises. Our success with large format variants is stabilising the share of JPS and West benefited from the migration of Route 66, which we completed in the year. Our overall share was down but strengthened in the second half, due to the actions we took.

Benelux Brand migrations supported the good performance of JPS in fine cut tobacco, although the market size and our overall share declined following significant excise increases.

Australia We delivered another excellent performance from JPS, resulting in further strong share, revenue and profit growth.

Ukraine Investment was moderated in response to significant competitor discounting and currency devaluation that eroded market profitability. Our share improved in the second half as pricing conditions normalised.

RETURNS MARKETS SOUTH Full Year Result Change Constant 2016 2015 Actual Currency Market share % 29.1 29.0 R +10bps Net revenue £m 1,477 1,446 +2.1% -2.9% Net revenue per ‘000 SE £ 18.27 17.51 +4.3% -0.8% Adjusted operating profit £m 655 636 +3.0% -2.5% Growth Brand % of net revenue % 50.0 46.0 +400 bps

R See Performance Measures table on page 2.

Strong results in Algeria more than offset the impact of the weak operating environment in Morocco. We also saw improved market size trends in markets such as Spain and France, where the actions we have taken to strengthen performance continued to gain traction.

We improved our market share by 10 basis points, primarily due to the strong gains we made in Algeria, and we improved our market share trends in Morocco in the second half, driven by the launch of Fox. We made good progress in further building the contribution from our Growth Brands, with these brands now generating 50.0 per cent of our tobacco net revenue, up from 46.0 per cent last year. Profitability was affected by the same factors outlined in the Returns Markets overview.

Country Performance

Spain We continued to focus on customer engagement initiatives to strengthen our ties with retailers, while maintaining good growth momentum with West. The ongoing migration of Ducados to JPS is also enhancing the quality of our portfolio.

France News continues to grow share following the success of the Fortuna migration and the launch of several new variants in fine cut tobacco. The next phase of portfolio simplification is generating strong initial results.

Algeria We delivered an excellent performance, generating significant share and profit growth, driven by Gauloises, which we have established as the market-leading brand.

Morocco Our recently launched value brand Fox reached 10 per cent share, helping to address volume declines in Marquise. Revenue and profit was affected by the conclusion of the Philip Morris International agreement.

16 Imperial Brands Brands PLC| Annual | Annual Report Report andand Accounts 2016 2016 FINANCIAL REVIEW OVERVIEW

Excellent Track Record of Delivery The excellent progress we are making in simplifying our brand portfolio and reducing complexity across the business is central

to our cost optimisation and capital discipline agenda. STRATEGY

As we reduce the number of brands, we are able to align our manufacturing and supply chain to deliver operating efficiencies and optimise our working capital needs. At the same time, we are adopting new ways of working and embracing lean principles to reduce overheads and improve our effectiveness.

This is delivering tangible savings that we are able to reinvest in driving top-line growth. We have established a track record PERFORMANCE of increasing operating profit margins and adjusted earnings per share in each of the past three years. Our capital discipline has Oliver Tant driven high cash conversion which underpins our commitment Oliver Tant Chief Financial Officer to grow dividends, repay debt and invest in the business. Chief Financial Officer

Strong Financial Performance We delivered another year of strong financial Our results benefited from the acquisition of assets in the USA last year, with an additional volume of 12.1 billion stick equivalents and performance, with growth in revenue and £682 million of net revenue in the year. GOVERNANCE adjusted profit and consistently high cash Outside the USA, volumes were affected by market size declines, conversion. Our relentless focus on cost difficult trading caused by the conflict in Iraq and Syria and by our efficiencies and capital discipline is decision to deprioritise volume in markets such as Ukraine where profitability has been affected by competitor discounting and adverse providing resources to reinvest to support currencies. Positive price/mix and cost control initiatives mitigated growth, generate returns for shareholders these impacts. Reported tobacco net revenue was up 14.7 per cent, reflecting our market choices and the benefit of currency exposures. and pay down debt. FINANCIALS Tobacco net revenue was up by 9.7 per cent at constant currency. When managing the performance of our business we focus on The proportion of Group net revenue from our Growth and Specialist non-GAAP measures, which we refer to as adjusted measures. We Brands increased to now represent 60.1 per cent, improving the believe they provide a useful comparison of performance from one quality of our revenue and strengthening our sustainability. Tobacco period to the next. These adjusted measures are supplementary to, adjusted operating profit increased 10.4 per cent to £3.36 billion, and and should not be regarded as a substitute for, GAAP measures, on a reported basis increased 12.1 per cent. which we refer to as reported measures. The basis of our adjusted Logista again delivered an encouraging performance in a challenging measures is explained in our accounting policies accompanying environment with adjusted operating profit of £176 million compared our financial statements, and reconciliations between reported with £154 million last year, partly as a result of foreign exchange and adjusted measures are included in the appropriate notes to our movements; on a constant currency basis adjusted operating profit financial statements. Percentage growth figures for adjusted results grew 9.1 per cent. The improvement was driven by the development are given on a constant currency basis, where the effects of exchange of its non-tobacco business, particularly pharmaceutical, wholesale rate movements on the translation of the results of our overseas and transport, a stronger tobacco market, as well as the benefit of operations are removed. continued cost controls.

Group Results – Constant Currency Analysis Year ended Constant Year ended Constant 30 September Foreign currency 30 September currency £ million unless otherwise indicated 2015 Exchange growth 2016 Change change1 Tobacco net revenue 6,251 307 609 7,167 14.7% 9.7% Growth Markets net revenue 1,449 57 62 1,568 8.2% 4.3% USA Market net revenue 707 113 657 1,477 108.9% 92.9% Returns Markets North net revenue 2,649 64 (68) 2,645 -0.2% -2.6% Returns Markets South net revenue 1,446 73 (42) 1,477 2.1% -2.9% Tobacco adjusted operating profit 2,895 163 302 3,360 16.1% 10.4% Growth Markets adjusted operating profit 409 25 9 443 8.3% 2.2% USA Market adjusted operating profit 375 64 384 823 119.5% 102.4% Returns Markets North adjusted operating profit 1,475 39 (75) 1,439 -2.4% -5.1% Returns Markets South adjusted operating profit 636 35 (16) 655 3.0% -2.5% Logistics distribution fees 749 39 21 809 8.0% 2.8% Logistics adjusted operating profit 154 8 14 176 14.3% 9.1% Adjusted operating profit 3,053 171 317 3,541 16.0% 10.4% Adjusted net finance costs (467) (30) (27) (524) 12.2% 5.8% Adjusted earnings per share (pence) 212.5 11.5 25.6 249.6 17.5% 12.0%

1. See Performance Measures table on page 2.

17 Imperial Brands PLC | Annual Report and Accounts 2016 www.imperialbrandsplc.com 17 FINANCIAL REVIEW CONTINUED

Group Earnings Performance Adjusted Reported £ million unless otherwise indicated 2016 2015 2016 2015 Operating profit Tobacco 3,360 2,895 2,126 1,910 Logistics 176 154 98 74 Eliminations 5 4 5 4 Group operating profit 3,541 3,053 2,229 1,988 Net finance costs (524) (467) (1,350) (261) Share of profit of investments accounted for using the equity method 28 29 28 29 Profit before taxation 3,045 2,615 907 1,756 Taxation (609) (541) (238) (33) Profit for the year 2,436 2,074 669 1,723 Earnings per ordinary share (pence) 249.6 212.5 66.1 177.4

Reconciliation of Adjusted Performance Measures Operating profit Net finance costs Earnings per share (pence) £ million unless otherwise indicated 2016 2015 2016 2015 2016 2015 Reported 2,229 1,988 (1,350) (261) 66.1 177.4 Acquisition costs – 40 – – – 4.2 Amortisation of acquired intangibles 1,005 697 – – 78.0 57.5 Fair value losses/(gains) on derivative financial instruments – – 807 (226) 76.2 (22.7) Post-employment benefits net financing costs – – 19 20 1.3 1.5 Restructuring costs 307 328 – – 23.9 24.9 Tax on unrecognised losses – – – – 5.9 (28.6) Items above attributable to non-controlling interests – – – – (1.8) (1.7) Adjusted 3,541 3,053 (524) (467) 249.6 212.5

Adjusted net finance costs were higher at £524 million (2015: The weakening of sterling versus the euro and US dollar positively £467 million) reflecting the full year impact of the cost of the USA impacted reported and adjusted measures. On a constant currency acquisition debt partially offset by a reduction in our all-in cost basis, adjusted earnings per share grew 12.0 per cent. of debt. The restructuring charge for the year of £307 million (2015: Reported net finance costs were £1,350 million (2015: £261 million), £328 million) relates mainly to our cost optimisation programme incorporating the impact of the net fair value and exchange losses announced in 2013 (£188 million) and integration costs relating to on financial instruments of £807 million (2015: gains of £226 million) the assets acquired in FY15 (£49 million). and post-employment benefits net financing costs of £19 million The total restructuring cash flow in the year ended 30 September 2016 (2015: costs of £20 million). was £268 million (2015: £256 million). After tax at an effective adjusted rate of 20.0 per cent (2015: 20.7 per cent), adjusted earnings per share grew by 17.5 per cent Cost Optimisation to 249.6 pence. The effective reported tax rate is 26.2 per cent (FY15: The first phase of our cost optimisation programme is still expected 1.9 per cent). The effective reported tax rate for 2015 was unusually to deliver savings of £300 million per annum from September 2018 low, largely due to the recognition of previously unrecognised tax and to have a cash implementation cost of in the region of £600 losses as a deferred tax asset, on the basis that taxable profits would million. £65 million was realised in 2016 through a range of initiatives arise in the relevant entities following the acquisition of assets in focused on reducing overheads and product cost. the USA. As we simplify the business, optimise our manufacturing footprint The effective tax rate is sensitive to the geographic mix of profits, and leverage our global scale through procurement we have been reflecting a combination of higher rates in certain markets such as able to realise operational efficiencies. The cumulative savings to the USA and lower rates in other markets such as the UK. The rate is date are £240 million. In 2016, the cash cost of the programme was also sensitive to future legislative changes affecting international £80 million (2015: £169 million) bringing the cumulative net cash businesses such as changes arising from the OECD’ s (Organisation cost of the programme to £420 million. for Economic Co-operation and Development) Base Erosion Profit Shifting (BEPS) work. We have identified further opportunities to extend this programme and have announced a second phase of cost optimisation that is Reported earnings per share were 66.1 pence (2015: 177.4 pence) expected to drive a further £300 million of annual savings from reflecting non-cash amortisation of £1,005 million (2015: £697 million) September 2020, at a cash cost in the region of £750 million. and restructuring costs of £307 million (2015: £328 million), as well as the effects of fair value and exchange losses in finance costs Capital Discipline mentioned above. The difference between reported (66.1p) and Our continued focus on capital discipline is driving free cash flow adjusted earnings per share (249.6p) is materially due to the same that has enabled a further £1 billion of debt reduction at constant three items. currency. Our dividend pay-out ratio of 62 per cent is among the lowest among our tobacco peers, leaving significant headroom for future dividend growth.

18 Imperial Brands | Annual Report and Accounts 2016 Imperial Brands PLC | Annual Report and Accounts 2016 18 OVERVIEW

Reported net debt increased by £1.4 billion, with adjusted net debt Further Strong Dividend Growth increasing by £1.3 billion. The increase in adjusted net debt represents We have delivered another year of 10 per cent growth in our dividend, a £1.0 billion debt reduction from our continued focus on capital demonstrating our commitment to growing shareholder returns. discipline before taking into account a £2.3 billion adverse impact This is our eighth consecutive year of double digit dividend growth. STRATEGY of foreign exchange and fair value of derivatives. The Group has paid two interim dividends of 23.5 pence per share The denomination of our closing adjusted net debt was split each in June 2016 and September 2016, in line with our quarterly approximately 56 per cent euro and 44 per cent US dollar. As at dividend payment policy to give shareholders a more regular 30 September 2016, the Group had committed financing in place of cash return. around £17.3 billion. Some 24 per cent was bank facilities, 6 per cent The Board has approved a further interim dividend of 54.1 pence was commercial paper and 70 per cent was raised through per share and will propose a final dividend of 54.1 pence per share, capital markets. bringing the total dividend for the year to 155.2 pence per share, up PERFORMANCE Following targeted cancellation of certain bank facilities during the 10 per cent and in line with our policy of growing dividends by at financial year, enabled by free cash flow generation, the outstanding least 10 per cent per year over the medium term. syndicated acquisition facilities through which we funded our 2015 The third interim dividend will be paid on 30 December 2016 with USA acquisition have been reduced to $0.9 billion. an ex-dividend date of 17 November 2016. Subject to AGM approval, Our all-in cost of debt reduced 40 basis points to 3.9 per cent the proposed final dividend will be paid on 31 March 2017, with an (2015: 4.3 per cent) as older debt matured and was repaid. Our interest ex-dividend date of 16 February 2017. cover was 7.1 times (2015: 6.3 times). We remain fully compliant with

all our banking covenants and remain committed to retaining our Liquidity and Going Concern GOVERNANCE investment grade ratings. The Group’s policy is to ensure that we always have sufficient capital markets funding and committed bank facilities in place to meet All of our capital allocation decisions are subject to relevant foreseeable peak borrowing requirements. commercial analysis and hurdle rates to ensure they deliver appropriate levels of return, and potential acquisitions are judged In reviewing the Group’s committed funding and liquidity positions, on strict financial and commercial criteria including the ability the Board considered various sensitivity analyses when assessing to enhance the Group’s return on invested capital (ROIC). Typically, the forecast funding and headroom requirements of the Group in we seek an overall internal rate of return in excess of 13 per cent the context of the maturity profile of the Group’s facilities. The Group across the investments we make in our existing business. This plans its financing in a structured and proactive manner and remains FINANCIALS disciplined approach is supporting our investment choices and confident that sources of financing will be available when required. underpins returns for shareholders. Our ROIC measure increased Based on its review, and having assessed the principal risks facing this year to 13.9 per cent (2015: 11.0 per cent) as a result of continued the Group, the Board is of the opinion that the Group as a whole and discipline and the full year effect of the US acquisition. Imperial Brands PLC have adequate resources to meet operational During the financial year, we further enhanced our investment needs for a period of at least 12 months from the date of this report appraisal framework to even more closely align the risks and and concludes that it is appropriate to prepare the financial expected returns from capital allocation decisions, to ensure statements on a going concern basis. that investment is focused on delivering our strategic objectives The Board’s statement on its assessment of longer-term viability whilst generating attractive returns. is set out on page 32.

Taxation Policy Our global tax contribution through both indirect and direct taxation exceeds £17 billion annually (excluding Logistics).

Our policy is to ensure compliance with tobacco taxation and product supply legislation and to engage constructively with revenue Oliver Tant authorities worldwide to help combat illicit trade. We also engage Chief Financial Officer with revenue authorities and governments more widely on policy issues to voice opposition to aspects of regulation and excessively high tobacco taxation that are likely to increase illicit trade to the detriment of consumers, governments and the Group.

In the field of direct taxation, it is our policy to maintain a sustainably low effective tax rate in order to enhance shareholder value whilst having due regard to financial and reputational risk. Further information on income taxes is given in notes 8 and 21 to the financial statements.

In pursuing this policy it is of paramount importance that our actions comply with all national and international laws on corporate and tobacco taxation and that there is full disclosure and transparency in our dealings with all revenue authorities.

The Board is kept informed of all material developments relating to our taxation position with updates on tax matters regularly provided to the Audit Committee.

Imperial Brands PLC | Annualwww.imperialbrandsplc.com Report and Accounts 2016 19 CORPORATE RESPONSIBILITY

We run our operations and introduced a new section on the The progress we’re making continues responsible use of social media, a to be recognised externally, including in responsibly, recognising communication channel that has grown the 2016 Dow Jones Sustainability Index that how we behave today significantly since the Code was last where we scored 76 per cent in the published. The Code is available in 30 RobecoSAM assessment. impacts our business languages and published in full on our Towards the end of the year we tomorrow. website: www.imperialbrandsplc.com commissioned an independent materiality We track our Corporate Responsibility (CR) assessment to identify and prioritise the The responsible approach we take is integral performance against our progress in four most important sustainability issues for our to the success of our growth strategy and key areas: being responsible with products, business. The assessment involved input is underpinned by our values and Code of providing a rewarding workplace, respecting from a range of external stakeholders and Conduct. Our policies, internal controls and natural resources and reinvesting in society. will help to further develop our CR strategy. risk management processes further govern More details will be reported in 2017. the way we operate. These form the basis of our Responsibility Framework and are the priorities for our We measure our health and safety During the year we refreshed our Code of business, our people and our stakeholders. and environmental performance by Conduct and reissued it to all employees comparing our results with our 2009 The following pages provide an overview across Imperial Brands. In updating the baseline year, using independently Code we took the opportunity to reinforce of our CR achievements in the year. More verified financial year (FY) 2015 data. the links between the Code and our values detailed information can be found in the responsibility section of our website.

GOALS

To support To create FOCUS AREAS a great legitimate markets and workplace RE E SPO consumers AC N L SI KP B R LE O W W IT G OUR VALUES H N I P D R R We can I engage I own O A D W U E C

R T

S

We surprise I am We enjoy S E

C R E R I U N O V S E E S R T CODE OF CONDUCT L IN A G R U IN T A S N OC G IE IN TY CT ESPE To make R To reduce our positive societal environmental contributions impact

Key data reported in the Annual Report and Accounts for the year to 30 September 2016 as indicated in footnotes has been independently assured by PwC under the limited assurance requirements of the ISAE 3000 (Revised) standard.

The full assured data and PwC's assurance report are included in the Corporate Responsibility section of the website www.imperialbrandsplc.com/responsibility

20 Imperial Brands Brands PLC| Annual | Annual Report Report and and Accounts Accounts 2016 2016 OVERVIEW

RESPONSIBLE WITH PRODUCTS Combatting Illicit Trade REWARDING WORKPLACE The illegal market in tobacco undermines We ensure our products are manufactured, Our goal is to provide a great workplace society’s efforts to ensure that tobacco marketed and sold responsibly. for our employees. We aim to provide a safe,

products are marketed responsibly. STRATEGY pleasant working environment that inspires We recognise there are societal concerns As well as depriving governments of them to do their best. about the health risks of smoking and valuable tax revenues, illicit trade has other acknowledge that smoking is a cause adverse impacts: children can more easily A Diverse Workforce of serious disease in smokers. obtain tobacco, adult consumers are We employ around 34,000 people including exposed to products that have no quality 13,100 women, representing 39 per cent of Adhering to High Standards controls, and retailers and tobacco our total workforce. At a senior leadership We are rightly expected to adhere to high companies lose legitimate sales. level, 22 per cent of the Operating Executive product standards. In rigorously testing and and 30 per cent of the Board are female, as PERFORMANCE analysing our products we ensure that we We advocate a partnership approach to of 30 September 2016. continually build our knowledge and are combatting illicit trade and seek to work able to fulfil our duty of care to consumers, with governments and customs and law We benefit enormously from our diverse as well as meet legal requirements for enforcement agencies to tackle the problem workforce; our people come from different scientific disclosures and submissions. of tobacco smuggling and counterfeiting. backgrounds and cultures, creating a vibrant working environment that thrives on new We see e-vapour as a key future growth Sharing our intelligence with these key ideas and fresh thinking. opportunity for the business and continue stakeholders led to a number of successful

to invest in the next generation of e-vapour operations in the year, including the The importance of diversity, equality and GOVERNANCE products, focusing on Fontem Venture’s disruption and closure of major counterfeiting non-discrimination is highlighted in our Code blu brand. facilities in Poland and Russia. of Conduct and underpinned by our values.

The long-term development of the e-vapour We have Memoranda of Understanding For us, equal opportunity is about assessing category depends on clear and consistent (MoU) with authorities around the world capabilities irrespective of gender, race, regulation. We support regulation that will and continue to invest in our long-term anti- disability, age, sexual orientation, religious drive high consumer safety and product illicit trade partnership agreement with the beliefs or any other aspect which is not quality standards. European Commission and Member States. related to performance.

During the year, we renewed our MoU in FINANCIALS Our research shows that the vast majority Our values capture the essence of what it’s Vietnam and signed new MoUs in Spain of tobacco smoke constituents are not like to be part of Imperial Brands, with the and Chad. In total, we now have 27 MoUs present in e-vapour products, which means ‘We’ and ‘I’ values reflecting the individual in place. e-vapour has potential as a reduced risk and collective behaviours we expect from product relative to tobacco. employees across all our subsidiaries. Working with Retailers We share our findings with regulators Tobacco products are for adults and should We are pleased that our efforts to provide and other key stakeholders and intend never be sold to children. We work with the best possible working environment and to continue to take an active role in the retailers to reinforce this message and opportunities for our people continue to be ongoing debates about e-vapour. encourage responsible selling. We support recognised externally. initiatives aimed at preventing sales of During the year we received a number Marketing Responsibly tobacco to children, including schemes of Best Employer awards, including in Legislation that governs the way tobacco that highlight the minimum age at the point Slovakia, Norway and Spain. should be advertised and marketed to the of sale. For example, in the UK we provide public exists in most markets. We also have training for independent retailers to improve our own stringent International Marketing their awareness and understanding of Standard (IMS), which is published on selling responsibly. our website. An independent report we commissioned All Imperial Brands companies and on smoking trends last year has helped us employees, and the agencies who work with prioritise markets for initiatives aimed at us around the world, must adhere to our IMS preventing children from getting access and local legislation at all times. To support to tobacco. We produced a guide to further IMS awareness and understanding we have support these markets implement their developed an e-learning module that has initiatives and engage with key stakeholders. been translated into 12 languages.

Imperial Brands PLC | Annualwww.imperialbrandsplc.com Report and Accounts 2016 21 CORPORATE RESPONSIBILITY CONTINUED

Engaging with our People The findings of an independent health We have a focus on anti-discrimination Regular engagement with our people and safety review undertaken last year and harassment, a healthy and safe working helps motivate them to do their best. We have formed the basis of an action plan for environment, responsible procurement, provide regular updates on our strategic improving our health and safety standards. supplier partnerships and environmental priorities and performance through a broad responsibilities. range of communication channels including The plan is being implemented across the meetings, emails, videos, intranet, social business and includes initiatives aimed at A detailed statement setting out the steps media, webinars, conferences and enhancing our performance in three key we have taken to mitigate the risk of slavery employee magazines. areas: working from heights, driving safely and human trafficking occurring within and managing stress and resilience. our business and supply chain during the A global engagement survey is conducted financial year can be viewed on our website. every 18 months and gives employees the We are pleased to see a continual reduction opportunity to tell us what it’s like to work in our sickness absence rate over the last The key findings and recommendations for Imperial Brands. We respond to their six years. Since 2009 the rate has declined of an independent human rights impact feedback and use it to shape action plans by 29 per cent. assessment we commissioned across our at both a local and global level. The 2016 Sickness Absence Rate global operations and supply chains are also available on our website. survey generated an excellent response (% of days worked)2 rate and showed an increase in overall Supplier Standards engagement levels. This is encouraging, 2016* 2.62 given the on-going change that is taking Working with supply chain stakeholders place in the business. 2015 2.65 to address important issues such as leaf sustainability and child labour is a priority. 2014 2.42 Workplace Health and Safety Social Responsibility The welfare of our people is of utmost 2013 2.72 in Tobacco Production Progress: importance to us. We have reduced our Total Weighted Mean (%)3 Lost Time Accident Frequency Rate by 2012 2.55 72 per cent over the last six years and 2015 continue to focus on improving health 2011 2.76 80 and safety standards across the business. 2014 2010 2.97 79 We were saddened that a contract driver 75 died in a road accident in the Central 2009 3.73 2013

African Republic. We assisted the authorities 2012 71 with their investigation and also carried out Seventy-nine per cent of our operations our own. The findings have been used to are now certified to the international 2011 68 further improve our employee Drive Safe occupational health and safety programme. management standard OHSAS 18001. 2010 63

Lost Time Accident 2009 60 REINVESTING IN SOCIETY Frequency Rate (per 200,000 hours)1 We are proud to have developed strong Our leaf suppliers have been required to partnerships with a wide range of take part in our Social Responsibility in stakeholders in many different Tobacco Production (SRiTP) programme for 2016* 0.40 communities around the world. many years. This programme encourages 2015 0.44 continual performance improvement in Human Rights areas such as employment, health and 2014 0.52 We have a role to play in addressing human safety, environmental management and rights issues, including slavery and human good agricultural practices. 2013 0.73 trafficking. Our respect for human rights In April 2016 we replaced SRiTP with the extends throughout our operations and is 2012 0.86 Sustainable Tobacco Production (STP) reflected in our Code of Conduct, our programme, a common industry-wide 2011 1.08 responsible leaf sourcing programme initiative supported by all the main tobacco Social Responsibility in Tobacco Production companies. All areas previously assessed 2010 1.30 (SRiTP) and our Supplier Standards, which by SRiTP are covered by STP. we use to exert influence in our business 2009 1.57 and supply chain.

1. Verified accident data is reported 12 months in arrears to allow for data collection and verification. FY15 data has been assured by PwC. 2. Sickness absence includes non-work related and work related absence. 3. All our tobacco suppliers participated in the SRiTP programme in 2015, which provides specific guidance for improvement against a variety of criteria. See our website for more information. Data for 2015 has been verified. We report 12 months in arrears to allow for the reporting and analysis of data. * Provisional unverified FY16 data – comprising verified data for the last six months of FY15 and unverified data for the first six months of FY16 – is provided in this report. Verified data for FY16 will be published next year.

22 Imperial Brands Brands PLC| Annual | Annual Report Report and and Accounts Accounts 2016 2016 OVERVIEW

We believe STP is a more robust programme We continue to be encouraged by the Resource Efficiency and will therefore provide an improved level growing number of employees who Getting the most out of the materials and of accuracy and precision in scoring the volunteer to get involved in projects linked natural resources we use is good for our performance of leaf suppliers. As a result to our responsibility framework. Our global business and good for the environment. STRATEGY of this increased robustness we expect our volunteering drive, entitled Mobilise for Absolute Energy Consumption first STP scores, which will be published May, involved employees supporting over (GWh)1 next year, to be lower than previous SRiTP 160 projects in 44 countries worldwide, scores. Our SRiTP score in 2016 increased exceeding our global target of 55,000 2016* 828 140 to 80 per cent. hours volunteered. 2015 781 140 We also have a Supplier Qualification RESPECTING NATURAL Programme for non-tobacco material 2014 824 145 (NTM) suppliers. This is a self-assessment RESOURCES PERFORMANCE questionnaire that covers business conduct, We respect natural resources and are 2013 876 145 environmental management, health and committed to further reducing our 2012 939 145 safety and employment practices. We environmental impact by minimising conduct periodic onsite audits to confirm waste, improving energy efficiency and 2011 984 145 these assessments. reducing emissions. 2010 996 145 Farmer Livelihoods and Child Labour Our Data Trends 2009 990 145 We oppose child labour and are actively We have set long-term targets for our key GOVERNANCE addressing the issue in our supply chains. environmental performance indicators, Energy consumption fleet energy, waste and water use. We track our We are a member of the Eliminating Child fuel (GWh) progress against our 2009 baseline year. Labour in Tobacco (ECLT) Foundation Energy consumption Manufacturing In line with other major companies, we and have ongoing constructive dialogue & Offices (GWh) measure our performance against the with Human Rights Watch (HRW), an amount of tobacco net revenue we generate. international non-governmental organisation Energy Consumption that conducts research and advocacy on (kWh/£million)1 human rights and has a strong interest Climate Change and Energy FINANCIALS in child labour in tobacco growing. At a Our Operational Excellence Programme, 2016* 144,334 meeting with HRW during the year we aimed at improving and embedding a leaner provided more information on how we way of working across our manufacturing 2015 147,247 partner with our suppliers to tackle sites, continues to be rolled out across 2014 147,284 child labour. the Group. 145,699 Our Leaf Partnership Programme continues We have reduced our energy consumption 2013 to support projects that seek to enhance by 15 per cent and our CO2 emissions by 2012 154,650 the livelihoods of farmers by reducing their 9 per cent over the last six years. overall labour requirement and improving Each year we participate in the CDP Climate 2011 163,287 fuel efficiency. This helps secure future Change Programme, which works with 167,938 tobacco supplies and is essential for providing organisations to measure and reduce their 2010 farmers with a better income and higher emissions and climate change impacts. 2009 172,227 standards of living, reducing poverty and the potential reliance on child labour. We continue to make improvements in this area, achieving a ‘B’ score from the CDP in 2016. This indicates we have a high level Supporting Communities We fund projects that are connected to of environmental stewardship and are the communities in which we operate. proactively managing climate change We particularly focus on supporting the matters as they relate to our business. We most disadvantaged communities around are also working with the CDP to capture our factories, offices and tobacco more information about the approach our sourcing activities. major suppliers take to climate change and water management, through the CDP Supply Chain Programme.

1. Environmental data is reported 12 months in arrears to allow for data collection and verification. The monetary value ‘£ million’ is for tobacco net revenue (or logistics distribution fees, where appropriate). FY15 data has been assured by PwC; see website for more information. ∗ Unverified FY16 data is estimated based on data from the last six months of FY15 and the first six months of FY16. Verified data for FY16 will be published next year.

Imperial Brands PLC | Annualwww.imperialbrandsplc.com Report and Accounts 2016 23 CORPORATE RESPONSIBILITY CONTINUED

Waste Water Consumption Greenhouse Gas Emissions Reporting (Tonnes/£million)1 (m3/£million)1 We report on greenhouse gas emissions resulting from our tobacco operations 2016* 7.35 2016* 239 which fall within our consolidated financial statements using the operational control 2015 7.73 2015 243 reporting approach.

2014 7.63 2014 251 We report Scope 1 (direct) and Scope 2 (indirect) emissions for which we are 2013 7.24 2013 235 responsible, using a methodology in line with the Greenhouse Gas (GHG) Protocol 2012 7.85 2012 274 Corporate Accounting and Reporting Standard (revised edition). 2011 7.47 2011 290 The scope of our GHG reporting is outlined 2010 8.0 2010 300 below and detailed in the 2016 non-financial 2009 8.25 2009 321 Reporting & Criteria Document in the Responsibility section of our website: Waste to Landfill www.imperialbrandsplc.com 1 Water Management (Tonnes/£million) We have a strong track record of effectively We report on the seven main greenhouse managing water use and have reduced gases and report in terms of tonnes of CO2 2016* 1.11 water consumption by 24 per cent since the equivalent (CO2e). Our relative emissions are expressed against tobacco net revenue. 2015 1.24 2009 baseline year. In our factories we apply environmental management systems under CO2 Equivalent Emissions 2014 1.57 the international standard ISO 14001, which (Tonnes/£million)1 also help to reduce water use and manage 2013 1.55 waste water, and each location has its 2016* 43.7 own local water management targets. 2012 1.61 As part of our focus on improving water 2015 44.3 2011 1.70 security in Africa we are funding an 2014 42.7 increasing number of projects related 2010 1.90 to water preservation. 2013 43.2 2009 2.08 In Malawi, for example, we are working 2012 46.4 Since the 2009 baseline year we have with one of our suppliers to create three 2011 reduced waste by 6 per cent and waste irrigation dams and six boreholes, which 50.2 to landfill by 40 per cent. is expected to provide 900 farmers with access to irrigation water and 1,500 people 2010 50.6 In manufacturing we are further increasing with access to clean water. 2009 48.6 our use of environmental management systems that are independently certified to the environmental management standard Absolute CO2 Equivalent Emissions ISO 14001. Ninety three per cent of our (Tonnes) factories are now certified to this standard.

2016* 35,168 160,274 97,282 Reforestation Programmes

In Africa, where wood is the primary fuel 2015 35,168 149,194 92,562 source and the majority of tobacco farmers are smallholders, we are actively involved 2014 36,907 155,129 88,470 in protecting natural forests and reducing 2013 36,907 162,146 103,739 wood consumption. 2012 36,907 176,577 111,688 We have continued to work with our African tobacco suppliers on a major tree planting 2011 36,907 188,939 121,383 programme that aims to achieve wood sustainability in Africa by 2022. This involved 2010 36,907 182,321 124,599 planting 1.7 million trees in Africa in 2016. 2009 36,907 183,632 99,906

CO2 equivalent emissions Scope 1 excl fleet fuel (Tonnes)

CO2 equivalent emissions Scope 2 (Tonnes)

CO2 equivalent emissions Scope 1 fleet fuel (Tonnes)

1. Environmental data is reported 12 months in arrears to allow for data collection and verification. The monetary value ‘£ million’ is for tobacco net revenue (or logistics distribution fees, where appropriate). FY15 data has been assured by PwC; see website for more information. ∗ Unverified FY16 data is estimated based on data from the last six months of FY15 and the first six months of FY16. Verified data for FY16 will be published next year.

24 Imperial Brands Brands PLC| Annual | Annual Report Report and and Accounts Accounts 2016 2016 OVERVIEW

Our Scope 1 emissions comprise: emissions Emissions for FY16 as reported here comprise unverified data for the first six months of FY16 from stationary fuel combustion at our sites; and verified data for the last six months of FY15, except for mobile fuel consumption by our emissions from mobile fuel combustion in fleet vehicles which comprises complete verified data for FY15. Verified data for FY15 is our fleet of company vehicles; leakage of reported 12 months in arrears to allow for collation, validation and external assurance. STRATEGY refrigerant gases; and process emissions We report separately below externally verified information provided by Logista, from the Dry Ice Expanded Tobacco process the Group’s subsidiary transport and logistics business which is managed remotely due at our tobacco expansion plant. Our Scope 2 to commercial sensitivities. Logista has provided verified data since FY14 for absolute emissions comprise the indirect emissions Scope 1, 2 and 3 emissions. resulting from the use of purchased electricity, heat and steam at our sites. Logista We report according to the GHG Scope 2 Scope 1 Scope 2 Scope 3 Guidance (2015), using location-based CO2 equivalent emissions (Tonnes) FY15 35,065 4,378 199,953 PERFORMANCE emission factors. FY14 35,731 4,455 213,081

We use the CO e factors and calculation 2 Logista’s Scope 1 emissions comprise stationary and mobile fuel combustion from transport methodology for fossil fuels and electricity operations for which Logista has operational control, and from the leakage of refrigerant set out in the UK Department for Environment, gases at those operations. Scope 2 emissions comprise indirect emissions resulting from Food and Rural Affairs (DEFRA) document the use of purchased electricity at sites under Logista’s operational control. Scope 3 ‘2014 Government GHG Conversion Factors emissions comprise transport activities for which Logista does not have operational control. for Company Reporting’.

Logista’s FY15 relative Scope 1 and 2 emissions comprise 52.7 tonnes (FY14: 47.4) of CO2 GOVERNANCE Our reported emissions include all main equivalents per million pounds of FY15 distribution fees (our non-GAAP revenue measure sources from manufacturing sites over for Logista). Further information on the scope of Logista’s GHG reporting is available at which we have operational control and our www.grupologista.com main offices (Bristol, Hamburg, Paris, Madrid and Casablanca). Operations not included, as deemed de minimis or being outside our current reporting scope, relate to small sales offices (which collectively contribute no more than 2 per cent of our total Scope 1 FINANCIALS and 2 emissions).

Imperial Brands PLC | Annualwww.imperialbrandsplc.com Report and Accounts 2016 25 RISK MANAGEMENT

Our ability to achieve our strategic objectives The Board has ultimate responsibility for the Group’s strategy and related risk appetite. The Board is also responsible for ensuring the and capitalise on growth opportunities effectiveness of the risk management and internal control systems, requires effective management of the risks with the Audit Committee assisting in the discharging of these we face. We define “risks” as anything that responsibilities. The OPEX (Operating Executive) is responsible for the operational could prevent the achievement of our stewardship of the business, including the ownership of the Group strategic objectives. risks and related assurance activities. OPEX ensures the successful and effective alignment of functional business plans to the Group APPROACH strategy, with business unit and functional management responsible for the delivery of operational performance and the management Risk is an inherent part of our operating environment. The VUCA of the inherent risks. These management teams are responsible for (volatile, uncertain, complex, ambiguous) world in which we operate ensuring that the Group’s strategic objectives are achieved in line requires effective management and monitoring of known risks, along with Group policies and standards, and that we conduct business with the identification and assessment of emerging risks, to achieve in compliance with our Code of Conduct. our strategic objectives. Central to this approach is the clear understanding that risk management is the responsibility The Group’s functional and divisional management structures, of all our people. led by our OPEX, enable a continuous process for the identification, evaluation and management of significant risks to the achievement The approach seeks to manage, rather than eliminate, the risk of of business objectives at both a Group and local level, enabling failure to achieve our strategic objectives and can only provide effective and timely identification of actual and emerging risks reasonable and not absolute assurance against material and responses to mitigate impacts or realise opportunities. misstatement or loss. A key enabler of our risk management approach is the deployment RISK MANAGEMENT FRAMEWORK of “Centres of Expertise” (2nd line). These are central functions employing technical experts with the knowledge and practical skills The Group’s risk management framework, aligned to the operating to develop and provide appropriate policy, process, control structures, model, is an integrated approach based upon the three lines of and support to local management (1st line) within our global business defence. The structure encourages the communication and to enable the consistent application of policy. escalation of risk and control related matters across the Group’s diverse geographic footprint.

THREE LINES OF DEFENCE

BOARD

OPEX AND LEADERSHIP TEAM MEETINGS AUDIT COMMITTEE

THREE LINES OF DEFENCE

1ST LINE 2ND LINE 3RD LINE Markets/ Clusters/ Centres of Expertise Internal Audit Divisions/ Factories (CoEs) or committees REGULATOR

Own risk / accountable Set framework of policies, Audit effectiveness of risk EXTERNAL AUDIT for identification and procedures, and controls management and control management of risks Guide compliant with legislation framework Support Perform front line controls in & Oversee Provide guidance, advice, Provide independent line with policies and support, training, and share assurance to Audit Committee procedures best practice and Board

Monitoring of control Reflect risks in Constructively challenge and effectiveness and related business plans issue recommendations performance

VALUES & CODE OF CONDUCT

26 Imperial Brands Brands PLC| Annual | Annual Report Report andand Accounts 2016 2016 OVERVIEW

An example of this is our Finance function. This has responsibility for accountability to provide information in keeping with our policies, the financial policies and standards adopted within the Group. It also procedures and internal best practices as documented in our Group manages our financial reporting processes to ensure the timely and Finance Manual. accurate provision of information, which enables the Board to STRATEGY The design of the Group’s operating model supports the ability of our discharge its responsibilities, including the production of our half operational teams to manage commercial, legal and regulatory risk at yearly and annual accounts. a local level in a consistent manner. Each business unit is responsible The central Finance function is supported by a network of finance for identifying, evaluating and monitoring the risks faced by their managers throughout the Group who have the responsibility and part of the business, and for ensuring compliance to policy and local legal requirements.

ASSESSMENT OF RISKS AND INTERNAL CONTROL COMPLIANCE PERFORMANCE In accordance with the recommendations of the FRC’s UK RISK IDENTIFICATION Corporate Governance Code (formerly known as the combined code) for Directors, the Group’s systems of internal control are designed and operated to support the identification, evaluation and management of risks affecting the Group. They facilitate the effective and efficient operation of our business, provide assurance regarding the integrity of our internal reporting and ASSESSMENT GOVERNANCE FOCUSFOCUS WITHIN are designed to comply with relevant laws and regulations, across MONITOR AND BUSINESSBUSINESS PLANNING COMMERCIAL EVALUATION all areas of operations. These systems are subject to continuous ANDAND FORECASTING IMPACT OF RISK AND PROCESSES review as circumstances change and new risks emerge. OPPORTUNITY

Risk Identification Embedding of risk foresight within the business is facilitated by the completion of formal risk assessment updates by business units on a quarterly basis aligned to our key planning and forecasting cycles, ensuring that risks are considered on a timely EFFECTIVE FINANCIALS RISK and ongoing basis. MITIGATION

Assessment and Evaluation Risk assessments are completed by operational management across the business, with consideration of both Group and local are required to complete key control assessments on a half risks required. These are reviewed and considered by senior yearly basis. The key controls highlighted within the assessment management as part of their monitoring of the underlying also support operational management to understand their drivers of business performance. responsibilities and accountabilities for the delivery of results in line with the Group’s risk appetite, and highlight areas of best Additionally, key Centres of Expertise provide an evaluation of practice that can be shared across the business. the results of the assessments, and provide valuable insight into the potential impact of changes in the regulatory environment Additionally, a year end certification process is completed, under which are confirmed in local risk registers and appropriate which management confirms that risk mitigation controls have actions planned. operated effectively throughout the year and that entities have complied with our policies, including the Code of Conduct and The results of the bottom-up risk assessment are reviewed by, and anti-bribery requirements, as well as fraud prevention processes. discussed with, the OPEX. The top-down calibration of risks by the Board and OPEX ensures a consistent top-down method in the Monitor Commercial Impact agreement, assessment and prioritisation of risks, as well as the The results of these assessments are provided to our Centres assessment of our existing measures to manage and mitigate of Expertise to enable any individual control trends to be resolved those risks and consideration of wider strategic impacts. on a Group basis, to enable targeted support to individual locations, and to provide feedback on the responses provided The Board receives the consolidated view of the bottom-up and relative to the work CoEs complete as part of their ongoing role. top-down inputs, and confirms its acceptance of these risks, and their alignment with the Group’s risk appetite. The results of the control assessments are provided to our Internal Audit function. This provides the opportunity for an independent The principal risks arising from the consolidated risk assessment verification of the responses through the testing completed by are provided on pages 28 to 31. Internal Audit as part of their annual plan and is an input to the development of that risk based plan. The results of Internal Audit Effective Risk Mitigation reviews are shared across the business in order to provide an The management of operational risk and compliance to the independent opinion on both compliance to, effectiveness and Group’s key control requirements is the responsibility of business appropriate design of our internal control framework unit and operational management. Policies, standards, processes The risk approach embeds the assessment of risk into the Group’s and related training are developed by subject matter experts in ongoing performance and business planning cycle. This enables the Group’s CoEs that assist in ensuring the business remains the assessment of risk based root cause analysis to be performed compliant with Group requirements. and timely understanding of the potential future impacts and As part of the communication and monitoring of internal control opportunities arising. By continuing to develop this foresight compliance our senior management within markets and factories we seek to reduce the probability of unforeseen events.

Imperial Brands PLC | Annual Report and Accounts 2016 www.imperialbrandsplc.com 27 PRINCIPAL RISKS AND UNCERTAINTIES

As a multi-national organisation, a large amount of the Group’s RISK PROFILE revenue in the year was generated in markets outside the UK and the The results of the risk assessment completed during the Group is therefore exposed to movements in foreign exchange rates business planning process have not highlighted any significant which could impact the Group’s financial results which are reported in changes from the previous year. The risks and their relative pounds sterling. Additionally, the Group is also exposed to movements probability and impact remain materially consistent. The only in foreign exchange rates due to its foreign subsidiaries, its commercial significant change in the strategic risks is the reduction in the trading transactions denominated in foreign currencies and foreign impact of mergers and acquisitions in the year resulting from currency cash deposits, borrowings and derivatives. the successful integration of the US business.

BREXIT All principal risks identified through the risk assessment process, There are a number of uncertainties in connection with the and agreed by the Board, have a potential impact in achieving future of the UK and its relationship with the EU. strategic objectives in the next 12 months, with an additional impact assessment considered over a longer three year horizon. We have considered the consequences that Brexit could have upon the business and have concluded that it does not raise In the following section we highlight the principal risks we face and any new risks but does impact a number of our existing risks identify the mitigations that we have in place to manage the impact on an individual basis e.g. exchange rate risk, product of these risks upon the business. Not all of these factors are within regulatory change, change in excise duty, illicit trade, our direct control, and the list cannot be considered to be exhaustive, availability of liquidity. Accordingly, the approach we have as other risks and uncertainties may emerge in a changing adopted is to consider the impact of Brexit in those risks. business environment. By aligning the management of the outcomes to existing risk As is common with most large organisations, the Group is subject to responsibilities this provides a more effective and operationally general commercial risks; for example, socio-economic, cyber-security focused mitigation of these impacts on an ongoing and breaches, failure of our IT infrastructure, liabilities arising from defined timely basis. benefit pension schemes, the impact of change programmes, the cost of our raw materials, and the impact of competition.

Reduction in size of the legitimate tobacco market Strategic priority – Strengthening our portfolio, Developing our footprint What affects us Potential consequences What we do

Product regulatory change Changes in legislation can have a negative effect We engage with authorities to provide informed input Regulatory restrictions exist on consumer choice, reducing consumption to unintended consequences of disproportionate in many of our markets which levels, and revenues. changes in legislation. impact our consumers by Compliance with regulation has an associated Regulatory changes are proactively managed to influencing availability, cost. Changes in regulation increase compliance ensure that the business is commercially positioned demand and freedom to requirements and can therefore result in an to positively manage the risks and opportunities use our products. increase in costs, potentially impacting profits. that such change creates.

The Group’s expertise and resources are prioritised according to the relevant key regulatory issues. Cross-market liaison is promoted within the Group to ensure best practice and opportunities from markets already impacted are identified, understood and applied.

Change in excise duty Increased cost to the consumer could potentially We engage with authorities to provide informed input Adverse changes in the level or reduce purchase volumes. to unintended consequences of disproportionate structure of excise duties as changes in excise. Any inability to pass on an increase in excise governments seek to raise could result in lower product margins. We take commercial steps to ensure strategic price public funds. and product offerings exist in the context of the The widening price differential between tobacco excise duty structures in each market. products in neighbouring countries increases the attractiveness to the consumer of purchasing non-domestic duty paid product.

28 Imperial Brands Brands PLC| Annual | Annual Report Report andand Accounts 2016 2016 OVERVIEW

Reduction in size of the legitimate tobacco market continued Strategic priority – Strengthening our portfolio, Developing our footprint What affects us Potential consequences What we do

Counterfeit and illicit non-duty Counterfeit and illicit trade reduces Specialist teams are employed to support the business, STRATEGY paid product in market the size of the legitimate market. governments, and law enforcement agencies with targeted The consequence of excise solutions to illicit trade. The sale of counterfeit product and and regulatory regimes is a smuggled “illicit whites” in our markets We maintain strong standards and controls for our widening gap between the price of acts as a direct competitor to legitimate business and our first-line customers to prevent diversion legitimate and illegitimate product. domestic duty paid, travel retail and of our products. As a result the legitimate tobacco duty free products, eroding our industry continues to be subject to We seek to partner with governments and law enforcement volumes and market shares.

the significant impact and agencies around the world on anti-illicit trade initiatives. PERFORMANCE increasing threat of illicit trade. Counterfeit product is not subject to We work alongside the European Commission’s Anti-Fraud the stringent quality requirements Office (OLAF) and law enforcement agencies. of legitimate product. Customer perception of inferior quality could impact the reputation of genuine product and damage our brands.

Macro-economic conditions in Any material change in the economic We continually monitor and analyse consumption patterns key markets circumstances of, and/or our and economic indicators in order to ensure that our current GOVERNANCE The Group has a significant performance in, our key markets may and future portfolio provides the consumer with a range of presence in mature European affect our future profit development products across different price points. This analysis is markets and the US. Increased and have an adverse impact on the completed at both a local and Group level and provides a economic uncertainty, related Group’s revenue or profits. key input to our product development, business planning austerity measures, or geo-political and pricing strategies. pressures in those markets could Our international footprint and comprehensive portfolio lead to a reduction in consumption provide an increasingly balanced exposure to both EU and of legitimate product. FINANCIALS non-EU markets.

Optimising market share Strategic priority – Strengthening our portfolio, Developing our footprint What affects us Potential consequences What we do

Brand equity Adverse impact upon planned sales We have a consistent strategic marketing approach across Failure to maintain and grow volumes and revenues resulting from markets, supported by monitoring of our brand equity. brand equity or an inability to utilise a reduction in customer brand loyalty. Brand migrations support the strategy to simplify the portfolio, that brand equity (as a result of reducing complexity in the supply chain and providing cost disproportionate product regulatory savings that can in turn be reinvested in the brand propositions. changes such as plain packaging). Market trends and competitor innovations are monitored in order to ensure we maintain the strength and relevance of our brand offerings.

We employ experts to ensure that the intellectual property of our brands is appropriately protected.

Product quality Brand and reputational damage Quality control testing and monitoring is a core part of our Product fails to meet regulatory resulting in reduced sales volumes. manufacturing and supply chain processes, with robust or consumer requirements. regulatory compliance completed on a continual basis. Potential financial penalty and regulatory censure resulting from Customer complaints monitoring and escalation processes failure to maintain appropriate exist across our markets, ensuring that customer feedback product standards. is acted upon and any quality issues are managed in an effective and appropriate manner.

In the event of the requirement to recall product, effective processes exist to mitigate the risks to our supply chain.

Speed of response Failure to maximise opportunities Product innovation and customer propositions are monitored The Group fails to respond in markets. across our markets. Customer trends and choices are to market dynamics in a analysed at both a local and Group level, with effective Reduction in sales volume or revenues timely manner. processes in place to support innovation. resulting from failure to maintain portfolio in line with changing consumer demands.

29 Imperial Brands PLC | Annual Report and Accounts 2016 www.imperialbrandsplc.com 29 PRINCIPAL RISKS AND UNCERTAINTIES CONTINUED

Access to funding Strategic priority – Capital discipline What affects us Potential consequences What we do

Financial market risk A fall in certain of our credit ratings We have a strong focus on cash generation and the reduction We have a significant level of would raise the cost of our existing in our debt over time. committed debt, financed in the committed funding and could raise Our Treasury Committee (TC) oversees the operation of the debt capital markets and bank loan our cost of future funding and affect Treasury function in accordance with the terms of reference markets. We expect any future our ability to raise debt from the set out by the Board. required refinancing of this debt current breadth of funders. prior to maturity to be obtained The TC sets out a framework for the Treasury function to Approximately 71 per cent of the from these markets and for us to be operate within. The framework, which is periodically fully Group’s net debt is currently at fixed able to rely on funds being available reviewed, covers, amongst other things, financing, liquidity levels of interest, and therefore the from our bank counterparties when and risk management, which includes interest rate, foreign Group is exposed to movements in requested to be drawn. exchange and counterparty risk. The TC receives regular interest rates which could result in reporting on matters covered by the framework. higher funding costs and cash outflows on the remainder. Cash flows, financing requirements and key rating agency metrics are regularly forecast and updated in line with We also place cash deposits and enter business performance. This information is considered into derivative financial transactions alongside conditions in the debt capital and bank loan markets with a diversified group of financial to ensure we are well placed to meet the future financing institutions and we would be affected needs of the Group and optimise its cost and availability. if those counterparties did not honour their commitments. For significant acquisitions of overseas companies, borrowings are raised in the appropriate currency (or are

swapped via derivatives into the appropriate currency) to minimise the balance sheet foreign exchange translation risk.

Cost optimisation and strategic change initiatives Strategic priority – Cost optimisation, Capital discipline What affects us Potential consequences What we do

Cost optimisation Failure to align cost base results in Continued focus upon cost and cash agenda embedded Failure to achieve expected cost reduced profit and cash available for within the business planning and operational processes. efficiencies. reinvestment in the business. The Group’s investment appraisal process provides robust and Reduction in stakeholder confidence effective assessment and challenge of investment requests. as a result of failure to achieve Monitoring of cost and cash form a key part of business committed cost savings. performance reporting.

Operating model and other The implementation of change To support the successful delivery of material initiatives strategic change initiatives initiatives could involve particular within the organisation the Group has developed and In order to achieve our strategic challenges and require management implemented a standardised project management process objectives, the Group may be attention that would otherwise be that provides a robust framework to enable effective required to undertake material devoted to running our business. change management. initiatives, including change We may be unable to realise the The majority of the Group’s material change programmes programmes and acquisitions. anticipated benefits of change are coordinated under a single umbrella programme, programmes and within the ensuring alignment of deliverables, management of timeframe contemplated. interdependencies, and limiting the impact of change upon our operational activities. Any inability to deliver change programmes to either intended scope, The Operating Executive receives regular reporting on cost or time could have an adverse the progress of key projects. This provides a continuing effect on cost, cash and profit. assessment of deliverables in changing markets, and the evaluation of interdependencies across the business.

30 Imperial Brands | Annual Report and Accounts 2016 Imperial Brands PLC | Annual Report and Accounts 2016 30 OVERVIEW

Compliance with legal and regulatory requirements Strategic priority – Developing our footprint What affects us Potential consequences What we do

Failure to comply with legislation This may cause damage to our The Group’s policies and standards, including our Code STRATEGY Failure to comply with local and reputation and has the potential for of Conduct, mandate that all employees must comply international laws (including financial and criminal penalties for with legislation relevant to a UK listed company and in the sanctions) may result in both the Group and individuals. countries in which they operate. E-learning and courses are investigations. provided to management and relevant employees to ensure The cost of responding to any understanding of key regulatory and compliance requirements. investigations can be substantial and require significant resource Senior management certify the compliance of their area of and management focus. the business with the Code of Conduct as part of an annual certification process. Exceptions are reported and mitigating PERFORMANCE actions taken.

We closely monitor developments in international sanctions and actively seek external advice to ensure that we remain compliant with them.

Centres of Expertise and steering groups exist for key areas of legal compliance to provide expert advice in the development

of policy, process, training and monitoring of compliance. GOVERNANCE

Tobacco litigation To date, no tobacco litigation claim We employ internal and external lawyers specialising in the Tobacco litigation claims are brought against the Group has been defence of product liability litigation to provide advice and pending against the Group successful and/or resulted in the guidance on defence strategies and to direct and manage in a number of countries. recovery of damages. litigation risk and monitor potential claims around the Group.

More claims may be brought in the If any claim were to be successful, it The US cigarette brands have been acquired without historic future, including claims for personal might result in a significant liability product liabilities and with an indemnity from Reynolds injury and the recovery of medical for damages and might lead to further American in respect of any liabilities relating to the period FINANCIALS costs allegedly incurred in treating claims against us. Regardless of the prior to acquisition. smokers. The US, the jurisdiction outcome, the costs of defending such with the greatest prevalence of claims can be substantial and may smoking and health-related not be fully recoverable. litigation, is also now a key country for the Group.

Significant market positions Any allegation of inappropriate market The Group’s policies and standards, including our Code of Our significant market position behaviour creates the risk of financial Conduct, mandate that all employees must comply with in certain countries could result penalty, and/or regulatory censure, competition laws in the countries in which we operate. in investigations and adverse and negative publicity. We provide training and guidance to relevant employees regulatory action by relevant detailing the obligations and requirements of competition authorities. competition laws.

We employ experienced internal and external lawyers specialising in competition laws to provide advice and guidance regarding interpretation and compliance with competition laws.

In the event of any investigation (which may or may not result in actions being brought against us), we cooperate fully with the relevant authority making the investigation and will continue to do so.

31 Imperial Brands PLC | Annual Report and Accounts 2016 www.imperialbrandsplc.com 31 PRINCIPAL RISKS AND UNCERTAINTIES CONTINUED

VIABILITY STATEMENT Whilst the Board has no reason to believe the Group will not be viable The Board has assessed the prospects of the Company over a longer over a longer period, the period over which the Board considers it period than the 12 months required by the going concern requirements possible to form a reasonable expectation as to the Group’s longer- of the Code. This longer-term assessment process supports the term viability, based on the risk and sensitivity analysis undertaken, Board’s statements on both viability, as set out below, and going is the three-year period to September 2019. This reflects the period concern, made on page 19. used for the Group’s business plans and has been selected because, together with the planning process set out above, it gives management The Group’s annual corporate planning processes include completion and the Board sufficient, realistic visibility on the future in the of a strategic review, preparation of a three-year business plan and a context of the industry environment. The Board has considered rolling re-forecast of current year business performance and prospects. whether it is aware of any specific relevant factors beyond the The plans and projections prepared as part of these corporate three-year horizon and confirmed that there are none. planning processes consider the Group’s cash flows, committed The Board confirms that its assessment of the principal risks facing funding and liquidity positions, forecast future funding requirements, the Group, including those that would threaten its business model, banking covenants, and other key financial ratios, including those future performance, solvency and/or liquidity, and which are set out relevant to maintaining our investment grade ratings. in the Principal Risks and Uncertainties section on pages 28 to 31, Where appropriate, sensitivity analysis is undertaken to stress-test was robust. the resilience of the Group and its business model to the potential On the basis of this robust assessment of the principal risks facing impact of the Group’s principal risks, or a combination of those risks. the Group, and on the assumption that they are managed or mitigated This stress-testing takes account of the availability and effectiveness in the ways disclosed, the Board’s review of the business plan and of the mitigating actions that could realistically be taken to avoid other matters considered and reviewed during the year, and the or reduce the impact or occurrence of the underlying risks. In results of the sensitivity analysis undertaken and described above, considering the likely effectiveness of such actions, the conclusions the Board has a reasonable expectation that the Company will be able of the Board’s regular monitoring and review of risk management to continue in operation and meet its liabilities as they fall due over and internal control systems, as described on page 27, are taken the period to September 2019. into account.

32 Imperial Brands Brands PLC| Annual | Annual Report Report andand Accounts 2016 2016 CHAIRMAN’S INTRODUCTION – GOVERNANCE OVERVIEW

ENSURING OUR ANNUAL REPORT IS FAIR, BALANCED AND UNDERSTANDABLE The Audit Committee and the Board review a number of STRATEGY long-established and embedded processes underpinning the compilation and assurance of the Annual Report to consider whether it is fair, balanced and understandable, including:

– reviewing the use of adjusted measures and their appropriateness in aiding users of our financial statements to better understand our performance year on year;

– drafting of the Annual Report by appropriate senior PERFORMANCE management who monitor regulatory changes and have

been formally briefed regarding the fair, balanced and understandable regulations. Overall coordination by the Mark Williamson Director of Group Communications to ensure consistency Chairman of drafting both across sections of the Annual Report and with other external statements; – extensive verification processes undertaken to ensure “Our high social, environmental and ethical factual accuracy; GOVERNANCE standards were integral to another strong – comprehensive reviews of drafts of the Annual Report performance in 2016.” undertaken by members of the OPEX and other senior management; This was another year of significant achievement for the Group – consideration and review of an advanced draft by Internal and I am particularly pleased with the excellent results we have Audit and the Disclosure Committee; achieved in the USA following last year’s acquisition of brands – the Audit Committee discussing the draft Annual Report and other assets. Following this increased exposure in the USA with both management and PwC and, where appropriate,

we appointed Steven Stanbrook and Therese Esperdy to the Board, challenging the content and any judgements and FINANCIALS both of whom bring extensive international experience, particularly assumptions used; in respect of the USA. – all Audit Committee and Board members receiving drafts of the Annual Report with sufficient time for review and comment The Board is responsible to shareholders and other stakeholders prior to the year-end meetings in November 2016; and for the long-term sustainable delivery of our strategy, activities and financial performance; this includes the efficient use of resources – the Audit Committee reviewing the final draft at its meeting and ensuring we operate with high social, environmental and in November 2016 on which it was required to express its ethical standards. opinion prior to consideration by the Board.

In this report we provide an overview of our governance framework After consideration of the above processes and review of the and, the work of the Board and its Committees which, together with Annual Report, the Directors confirm that they consider, taken as our Code of Conduct (available on our website), set the tone for the a whole, it is fair, balanced and understandable and provides the way we work, both in respect of relationships between colleagues information necessary for shareholders to assess the Company’s and with our customers and suppliers. position and performance, business model and strategy.

The standard of behaviour the Board expects from employees worldwide, together with our embedded governance framework, ensure we act with honesty and integrity. The standards of behaviour we require from our employees are often more stringent than those required by local regulations. Our policies and Code of Conduct cover key issues such as acceptable business practices, ethical and legal compliance matters, physical and data security as well as regulatory, governance and occupational health, safety and environmental issues.

More details of our governance framework, including how our sound and effective corporate governance practices support our strategy, are set out in the following sections and in the discussion on effectively managing the risks we face on page 26.

Mark Williamson Chairman

www.imperialbrandsplc.comwww.imperialbrandsplc.com 33 BOARD OF DIRECTORS

1. 2. 3.

4. 5. 6.

1. Mark Williamson, CA (SA) 3. Oliver Tant, BSc, CA (Scotland) 5. Therese Esperdy Chairman of the Board Chief Financial Officer Non-Executive Director

Skills and experience Skills and experience Skills and experience Mark is a qualified accountant, who brings Oliver held a number of senior positions in a Therese has significant international investment considerable financial and general managerial 32-year career at KPMG, including Global Managing banking experience having held a number of roles experience to our Board. Mark was Chief Financial Director Financial Advisory and Private Equity at JP Morgan including Global Chairman of JP Officer of International Power plc until 2012 and is Division and Head of UK Audit. Morgan’s Financial Institutions Group, Co-Head experienced in managing relationships with the He was also a member of both the UK and German of Asia-Pacific Corporate & Investment Banking, investor and financial communities. Prior to boards of KPMG. He brings to Imperial international Global Head of Debt Capital Markets, and Head of joining International Power plc, Mark was Group experience in change management, organisational US Debt Capital Markets. She began her career at Financial Controller and Group Chief Accountant restructuring, corporate finance and mergers Lehman Brothers and joined Chase Securities in of Simon Group. He is also a former Senior and acquisitions. 1997 prior to the firm’s merger with JP Morgan Independent Non-Executive Director and in 2000. Chairman of the Audit Committee of Alent PLC. Appointment Appointed to the Board of Directors in October Appointment Appointment 2013 and became Chief Financial Officer in Appointed Non-Executive Director in July 2016 Mark joined the Board in July 2007 and was November 2013. External appointments appointed Senior Independent Non-Executive External appointments Non-Executive Director and Chairman of the Director in February 2012. He was subsequently Finance Committee of National Grid Plc. appointed Deputy Chairman of the Board in No external Director appointments. January 2013 before being made Chairman E D A N R in February 2014. External appointments 4. Matthew Phillips, LLB 6. David Haines Senior Independent Non-Executive Director Chief Development Officer Non-Executive Director and Chairman of the Audit Committee of National Skills and experience Grid plc. Skills and experience Matthew held a number of senior roles prior to David brings considerable senior level board D N Chairman his appointment to the Board as Corporate Affairs experience and was until March 2016 Chairman Director in June 2012 and has been integral to the and Chief Executive Officer of Grohe Group Sárl 2. Alison Cooper, BSC, ACA development and implementation of the and Chief Executive Officer of Lixil Water Chief Executive Officer Group’s strategy. Technology Group. He joined Grohe in 2004 from Vodafone Group PLC where he was Global Skills and experience In his current role he is responsible for Fontem Marketing Director. David is Chairman and Since being appointed as Chief Executive Alison Ventures, corporate development and corporate, Co-Founder of Grace Founders Sárl, a Luxembourg- has led the development and implementation legal and regulatory affairs. based investment company. He is also a former of the Group’s sustainable sales growth strategy. Appointment Chairman of Vimpelcom A/O. Alison joined the Group in 1999 and, through Appointed Director in June 2012. Appointed Chief Appointment a number of senior roles, has contributed Development Officer, June 2015. Appointed Non-Executive Director in February significantly to the international expansion External appointments 2012, and Chairman of the Remuneration of the Group. No external Director appointments. Committee in April 2012. Appointment E External appointments Appointed Director in July 2007. Appointed Chairman and Co-Founder of Grace Founders Sárl. Chief Executive in May 2010. D A N R Chairman External appointments Non-Executive Director, Inchcape plc since July 2009. E

34 Imperial Brands Brands PLC| Annual | Annual Report Report and and Accounts Accounts 2016 OVERVIEW STRATEGY

7. 8. 9. PERFORMANCE

Skills and experience of our Board The in-depth tobacco experience of our Executive Directors is complemented by the diverse global experience of our Non- Executive Directors, which includes FMCG, finance, mergers and acquisitions, and sales and marketing. GOVERNANCE

10. 11.

7. Michael Herlihy, MA (Oxon), Solicitor 9. Karen Witts, FCA 11. John Downing, MA, Solicitor Senior Independent Non-Executive Director Non-Executive Director Company Secretary

Skills and experience Skills and experience Skills and experience FINANCIALS Michael is General Counsel for Smiths Group plc. Karen brings significant financial and John joined Imperial in 2005 having worked for He was formerly General Counsel and Head of management expertise to the Board. She is the law firm Linklaters. Mergers and Acquisitions for ICI PLC with overall currently Chief Financial Officer and Executive He has had a number of senior legal roles in responsibility for corporate acquisitions and Director of Kingfisher plc and was previously Chief Imperial and was appointed Head of Group Legal divestments and has extensive experience with Financial Officer of the Africa, Middle East, Asia in 2010 and played a leading role in the Altadis both private and public market transactions. and Asia Pacific Region, at Vodafone plc. Prior to acquisition. He has considerable experience Appointment that, Karen held a number of senior positions at BT, in managing key corporate projects related Appointed Non-Executive Director in July 2007. including Chief Financial Officer of BT Retail and to financing, business development and other In February 2014 he was appointed as Senior Managing Director Operations Openreach. commercial matters. Independent Non-Executive Director. Appointment Appointment External appointments Appointed Non-Executive Director in February 2014. Appointed Company Secretary in June 2012. Serves on the board of Compass Partners External appointments S International LLP and is currently General Counsel Chief Financial Officer and Executive Director of Smiths Group plc. of Kingfisher plc. D A N R D A N R Key 8. Steven Stanbrook 10. Malcolm Wyman, CA (SA) E Executive Director D Non-Executive Director Non-Executive Director Non-Executive Director S Company Secretary Skills and experience Skills and experience N Succession and Nominations Committee Steven brings considerable international executive As a qualified accountant and former Chief A Audit Committee experience to the Board, gained in a number of Financial Officer of SAB Miller plc, with R Remuneration Committee FMCG companies. This includes 18 years at SC responsibility for the group’s financial operations, Johnson & Sons Inc., most recently as Chief corporate finance and development and group Operating Officer, where he was responsible for strategy, Malcolm brings not only a wealth of managing their international operations. financial expertise but also considerable general Previously, he held senior positions at Sara Lee management experience to the Board. Malcolm Corporation, including as Chief Executive Officer is also a former Non-Executive Director and of Sara Lee Bakery, and at CompuServe Corp. He is Chairman of the Audit Committee of Serco also a former Non-Executive Director of Chiquita Group plc. Brands International, Inc. and Hewitt Associates. He also meets the recent and relevant financial Appointment experience requirements of the UK Corporate Appointed Non-Executive Director in Governance Code. February 2016. Appointment External appointments Appointed Non-Executive Director in October 2011 Partner of Wind Point Partners and a Director of and Chairman of the Audit Committee in Autism Speaks. February 2012. D A N R External appointments Senior Independent Non-Executive Director and Chairman of the Audit Committee of Nedbank Group Limited, listed on the Johannesburg Stock Exchange. D A Chairman N R

www.imperialbrandsplc.comwww.imperialbrandsplc.com 35 THE BOARD AND ITS COMMITTEES BOARD

Focus for 2017 – continue our investment prioritisation to generate quality growth from key markets and Growth and Specialist Brands – continue optimising our ways of working supporting our growth agenda – support our growth agenda by further cost savings and capital discipline – further develop our employees’ capabilities and engender a growth mind-set – enhance our governance framework to further support our sustainable growth agenda

OVERVIEW

Mark Williamson The Directors are collectively responsible and accountable to our Chairman shareholders for the long-term sustainable success of the Group. The Board’s role is to provide leadership to the Group, set its strategy and oversee its implementation. “The consistent execution of our strategy The Board has a key role in ensuring that in achieving our strategy management operates responsibly within our governance framework continues to create sustainable shareholder whilst clearly demonstrating our values and high ethical standards. returns by maximising sales, cost and cash The Directors are also mindful of their legal duties to act in the way they consider, in good faith, will be most likely to promote the opportunities.” success of the Company for its shareholders whilst having regard to the interests of other stakeholders. Members Mark Williamson Chairman Matthew Phillips As part of the governance framework the Board has adopted a schedule Ken Burnett (to 3 February 2016) Oliver Tant of matters on which it must make the final decision. These include Alison Cooper Karen Witts approving the Group’s strategy, business plans, dividends and major Therese Esperdy (from 1 July 2016) Malcolm Wyman financial announcements. The Board is also responsible for approving the acquisition or disposal of assets exceeding defined thresholds. David Haines John Downing Michael Herlihy Company Secretary Within this framework the Board delegates responsibility for Steven Stanbrook (from 8 February 2016) developing and implementing strategy and for day-to-day management to our Chief Executive, Alison Cooper, who is Focus in 2016 supported by her fellow Executive Directors and by the Operating – continued integration of the USA business and delivery against Executive (OPEX), which she chairs. The Board also delegates our business plan matters to Board Committees. Clearly defined terms of reference – investment prioritisation to generate quality growth from key and written limits support these delegations. brands and markets and create new opportunities for Fontem The OPEX consists of senior executives from across the business. – continued implementation of new ways of working to simplify It oversees operational execution and delivers our strategic and the business and improve our effectiveness and agility financial plans. The OPEX and Audit Committee also ensure that – further cost savings and capital discipline appropriate internal controls, which function effectively, are in – further investment in our people including building capabilities, place, and effective risk management processes operate throughout succession and improving engagement the Group. MATTERS CONSIDERED BY THE BOARD IN 2016 Six principal scheduled Board meetings were held during the year

2015 2016 Oct Jan Mar Apr Jun Sept – Safety update – Safety update – Strategy – Safety update – Safety update – Safety update – Report and accounts – First quarter results meeting – Half-Year Report – Strategy review, – Business performance including period covered – Business performance – Dividend including opportunities – Business plan by viability statement – Strategy review – Business performance for Fontem – Corporate development – Dividend – AGM – Corporate development – Business – Board evaluation – Business performance – Group funding – Group funding including performance – Chairman and NED fees – Business planning – Operating model extension of debt – Appointment of Therese – Risk update Esperdy – Corporate development – EUTPD/ plain packaging issuance programme – EUTPD update including update – Overseas visit to Joure risks and opportunities – Appointment of Steven factory – insight into – Corporate identity Stanbrook operational excellence including change programme of name – ADR ratio change

36 Imperial Brands Brands PLC| Annual | Annual Report Report and and Accounts Accounts 2016 OVERVIEW SUCCESSION AND NOMINATIONS COMMITTEE

OVERVIEW Role The Committee keeps under review and evaluates the composition

of the Board and its Committees to maintain the appropriate balance STRATEGY of skills, knowledge, experience and independence to enable them to function effectively. Succession plans for the NEDs, Executive Directors and Group’s senior management, in particular the OPEX, are also kept under review.

The Committee also retains an overview of the development plans for OPEX members together with the wider organisational structure and talent management processes. PERFORMANCE The Committee’s terms of reference are available on our website.

Mark Williamson Boardroom Diversity Chairman As a global business, with our products sold in over 160 countries, diversity generally is an integral part of how we do business.

To maintain the appropriate balance of skills, diversity of knowledge, “We have the right people and the right professional and geographic backgrounds and experience on our Board we look ahead to upcoming retirements to identify potential GOVERNANCE succession plans to deliver our strategy and gaps and appoint individuals who are best suited to fill any vacancy. build on our long track record of generating The Committee is mindful of the Davies Review on gender diversity, significant returns to our shareholders.” however, appointing the best people to our Board is critical to the success of the Company; the search for candidates and any subsequent appointments are, therefore, made purely on merit Members regardless of gender, race, religion, age or disability. Given our Mark Williamson Karen Witts 1 commitment to appointing the best people and ensuring that all Chairman Malcolm Wyman

employees have an equal chance of developing their careers within FINANCIALS Ken Burnett (to 3 February 2016) John Downing the Group, we do not think it is appropriate to set targets for Board Therese Esperdy (from 1 July 2016) Company Secretary appointments. David Haines Michael Herlihy At the year end, women, including our Chief Executive, made up 30 Steven Stanbrook (from 8 February 2016) per cent of our Board, and 22 per cent of our OPEX. 1. Unless dealing with the succession of the Chairman. Turn to page 21 Executive Directors are invited to attend when appropriate. for further details on our workforce diversity

Focus in 2016 – ongoing review of skillset and composition of the Board – continuing business updates and education for NEDs DIRECTOR DEVELOPMENT – Board and senior management succession planning We are committed to the continuing development of our – appointment of Steven Stanbrook and Therese Esperdy Directors in order to build on their expertise and develop an ever more detailed understanding of the business and the Focus for 2017 markets in which we operate. – ongoing Board and senior management succession planning In addition to the ongoing ‘NEDucation’ and training – review of skillset and composition of the Board’s Committees discussed on page 45, we held our April 2016 Board meeting – continuing business updates and education for NEDs in our Joure factory, providing NEDs with insights into our Operational Excellence Programme. They also received updates on projects focused on our world class manufacturing performance and how we are implementing global best practice across our network of factories.

During September 2016 the Board visited the headquarters and facilities of ITG Brands in Greensboro, USA. They received presentations from the USA leadership team in respect of our USA operations, including an update on the brands and assets acquired from Reynolds.

www.imperialbrandsplc.comwww.imperialbrandsplc.com 37 THE BOARD AND ITS COMMITTEES SUCCESSION AND NOMINATIONS COMMITTEE CONTINUED

SUCCESSION AND NOMINATIONS COMMITTEE Board Succession IN 2016 Following nine years of valuable service Ken Burnett retired at Election and Re-election of Directors the 2016 AGM. The Committee identified the profile and skillset All Directors are appointed by the Board following a rigorous selection required for NEDs to support our strategy and instructed Korn/Ferry 1 process and subsequent recommendation by the Committee. Whitehead Mann to identify appropriate candidates. Within the Company’s policy of appointing the best people, Korn/Ferry Whitehead The performance of each Director is considered as part of the annual Mann was requested to give consideration to candidates who, in Board evaluation process. Following the 2016 evaluation, a review of addition to meeting the profile and skillset, add to the overall diversity the independence of each NED, particularly in respect of those who of the Board. From the list of strong candidates the Committee have served six years or more, and consideration of attendance, the identified Steven Stanbrook and Therese Esperdy as best suited Board recommends the re-election of all Directors at our 2017 AGM, to oversee and continue to develop the Group’s strategy. with the exception of Michael Herlihy, who having served on the 1. Korn/Ferry Whitehead Mann also provides online assessments to our sales function with Board for nine years, will be retiring at the AGM. a total value in the year of £117,500.

Meetings of the Board, Board Committees and AGM Succession and Annual Nominations Audit Remuneration General Board Committee Committee Committee Meeting Total number of meetings in Financial Year 6 4 4 4 1 Number of meetings attended in Financial Year Executive Directors Alison Cooper 6/6 – – – 1/1 Oliver Tant 6/6 – – – 1/1 Matthew Phillips 6/6 – – – 1/1 Non-Executive Directors Mark Williamson 6/6 4/4 – – 1/1 Therese Esperdy 2 1/1 1/1 1/1 1/1 – David Haines1 5/6 4/4 4/4 4/4 1/1 Michael Herlihy 6/6 4/4 4/4 4/4 1/1 Steven Stanbrook3 4/4 3/3 2/2 3/3 – Karen Witts1 6/6 3/4 3/4 3/4 1/1 Malcolm Wyman 6/6 4/4 4/4 4/4 1/1

1. David Haines was unable to attend one Board meeting due to being in hospital, however, he fully considered the papers before the meeting and provided his thoughts and recommendations to the Chairman. Karen Witts was unable to attend a Succession and Nominations Committee, an Audit Committee and a Remuneration Committee meeting held on the same occasion due to a conflict with a Board meeting at Kingfisher, however, she fully considered the papers before the meeting and provided her thoughts and recommendations to the Chairmen of each Committee. 2. Therese Esperdy was appointed to the Board on 1 July 2016. 3. Steven Stanbrook was appointed to the Board on 8 February 2016. The maximum number of meetings for each individual Director is the number which they were eligible to attend.

Tenure of Non-Executive Directors Board Gender Balance

8 years and over – 2 Male – 7 5 to 7 years – 1 Female – 3 3 to 5 years – 1 1 to 2 years – 3

38 Imperial Brands Brands PLC| Annual | Annual Report Report and and Accounts Accounts 2016 OVERVIEW AUDIT COMMITTEE

Following the FRC’s publication of the Revised Ethical Standard in June 2016, the Committee discussed the necessary amendments to ensure that the Group’s Auditor Independence policy contained

the appropriate tendering and rotation provisions, and appropriate STRATEGY guidance to protect the external auditors’ independence. The updated policy details the prohibited non-audit services and establishes rules for hospitality between the external auditors and Group employees, including Directors. We also reviewed the report issued by the FRC’s Audit Quality Review Team and the actions proposed to address the limited comments it contained. These actions should further enhance the quality of the audit PricewaterhouseCoopers (PwC) provides.

Another important aspect of our work is to critically review the PERFORMANCE detailed reports from both internal and external audit. This allows the Committee to fully understand all issues and, if required, Malcolm Wyman instigate appropriate action. I meet with the Director of Internal Chairman Audit and the lead Audit Partner of our external auditors, PwC, on a regular basis between Committee meetings.

To assist the Committee in overseeing the effectiveness of controls “The Committee has a key role in and risk management across the business, and to assist in addressing overseeing the Group’s internal control, the key matters detailed on pages 40 and 41, management prepared GOVERNANCE and presented to the Committee a wide range of papers, which risk management and governance provided sufficient information on each matter to facilitate frameworks to enhance the protection discussions and enable effective decisions to be taken. of our corporate reputation, people, assets, I am satisfied our activities provided the Committee with a good brands, products and information.” understanding of the key matters impacting the Group during the year and, in conjunction with its oversight of the governance and operation of the Group’s significant controls and processes, enabled Members1 FINANCIALS the Committee to draw the conclusions set out on page 41. Malcolm Wyman2 Steven Stanbrook (from 8 February 2016) Chairman Karen Witts2 Ken Burnett (to 3 February 2016) John Downing

Therese Esperdy (from 1 July 2016) Company Secretary David Haines Michael Herlihy Malcolm Wyman

Chairman of the Audit Committee Other regular attendees Board Chairman Director of Internal Audit3 Chief Financial Officer Deputy Company Secretary Director of Finance, Planning Representatives from PwC, our & Reporting external auditors3 Group Financial Controller

1. All members are independent Non-Executive Directors. 2. Malcolm Wyman and Karen Witts meet the Code’s requirement of having “recent and relevant financial experience”. 3. At each meeting, both the Director of Internal Audit and PwC have the opportunity to meet with the Committee without management present.

The Audit Committee report provides insight into the Committee’s activities and its deliberations in respect of the 2016 financial year. During the year we continued to focus on the Group’s ongoing enhancements to its risk management framework and processes and systems of internal governance and control whilst continuing to ensure the integrity of its financial statements and the quality of both the external and internal audits.

The Committee also reviewed its own performance as part of the overall Board evaluation. This review concluded that the Committee continues to carry out all of its duties effectively.

We meet four times in the year at key times within the Group’s reporting cycle, with comprehensive agendas covering all significant matters to be considered by the Committee. I also meet with management on an ad-hoc basis.

www.imperialbrandsplc.comwww.imperialbrandsplc.com 3939 THE BOARD AND ITS COMMITTEES AUDIT COMMITTEE CONTINUED

Main Objective – maintaining appropriate oversight over the work and effectiveness To assist the Board in fulfilling its corporate governance of the Internal Audit department, including reviewing its audit responsibilities relating to the Group’s financial statements, internal findings and monitoring management’s responses; control systems, risk management process and framework, the – scrutinising the independence, objectivity and effectiveness internal audit function and the external audit. During the year of PwC, including reviewing and approving the annual external the Committee achieved this by: audit plan, reviewing the audit findings, monitoring compliance – ensuring the integrity of our financial statements and related with ethical and professional guidance and approving PwC’s announcements, and assisting the Board in confirming that, terms of engagement. We also reviewed and approved the Group’s taken as a whole, our Annual Report is fair, balanced and revised Auditor Independence policy; and understandable, and provides the information necessary for – throughout the year, considering the key matters detailed below, shareholders to assess the Company’s position and performance, including taking account of PwC’s views. business model and strategy (see page 33); The Committee’s terms of reference are available on our website. – monitoring and evaluating the effectiveness of our risk management and internal control systems and speaking-up process;

AUDIT COMMITTEE MEETINGS HELD IN RESPECT OF THE 2016 FINANCIAL YEAR Four Committee meetings were held in respect of the 2016 financial year at key times within our reporting and audit calendar and included the following matters on the agenda:

2016 Jan Apr Sept Nov – Audit planning – Half-Year Report – Impairment considerations – Annual Report and Accounts – Internal Audit and Risk Management – Goodwill and impairment review – Taxation – Goodwill and impairment review review – External auditors’ report – Internal Audit and Risk Management – Use of adjusted measures – External auditors’ effectiveness – Tax report review – FX management – Governance and internal control – External auditors’ fees and – External auditors’ report and – Viability and going concern – Impairment considerations independence independence statements – Distributable reserves – Internal Audit and Risk Management – Viability and going concern – External auditors’ report – Restructuring accounting policy review, including consideration of – Governance and internal control – Internal Audit and Risk Management – Tax matters cyber risk – FX management review – Audit tendering – Governance and internal control – Distributable reserves – External auditors’ fees, independence – Tobacco related litigation – Restructuring costs and reappointment – Treasury update – Governance and internal control – Consideration of FRC’s Audit Quality – Tobacco related litigation Review Team review – Retirement benefits – Review of terms of reference – Revenue recognition

KEY MATTERS CONSIDERED The Committee considered the appropriateness of the following areas of significant judgement, complexity or estimation in connection with the financial statements, as set out below:

Focus area Why this area is significant How we as a Committee addressed this area

1 Goodwill and Goodwill and intangible We regularly received and considered detailed reports from management and intangible asset assets form a major part of challenged the methodology applied, the achievability of underlying business impairment the Group’s balance sheet forecasts, and macro-economic assumptions used. For the groupings of cash reviews and their current valuations generating units with the lowest headroom (Growth Division and Other Premium

See note 11 must be supported by Cigars), we examined different scenarios and sensitivities to assess whether of the financial future prospects. management’s conclusions were fair and balanced. The Committee also considered statements for further information. detailed reporting from, and held discussions with PwC. Resulting from the above, we concluded that management’s assertion that goodwill and intangible assets were not impaired was reasonable and, therefore, approved the disclosures in our financial statements and half year results.

2 Use of adjusted Non-GAAP or adjusted The Committee considered whether adjusted performance measures had been measures measures provide an prepared in accordance with our policy on the use of adjusted measures set out in

See note 1 for appropriate and useful Note 1 to the financial statements, and discussed this with PwC. We concluded that further information. assessment of business the Group’s policy continues to be applied consistently and is compatible with the performance and reflect the ESMA guidelines on alternative performance measures.

way in which the business is In its review of the Annual Report, the Committee has also taken account of the managed. They are also used FRC’s comments on the use of adjusted measures in its Annual Review of Corporate in determining annual and Reporting 2015/2016. long-term incentives for remuneration, and are widely used by our investors.

40 Imperial Brands Brands PLC| Annual | Annual Report Report and and Accounts Accounts 2016 OVERVIEW

Focus area Why this area is significant How we as a Committee addressed this area

3 Treatment of Restructuring costs is one of We periodically reviewed papers from management on actual and forecast levels restructuring the main items affecting our of restructuring costs. The restructuring costs disclosure for inclusion within the STRATEGY costs adjusted measures. There is Group’s financial statements and Half-Year results were also reviewed and discussed

See note 5 for a risk that restructuring with management and PwC. Following these detailed reviews and discussions, we further information. costs are treated or concluded that determination of restructuring costs was consistently applied and presented inappropriately that, notwithstanding the duration of some restructuring projects, costs were

within the Group’s financial disclosed appropriately. statements.

4 Going concern The Directors are required We examined the Group’s committed funding, its ability to generate cash and and viability to consider whether it is its ability to raise further funding. We challenged management’s cash projections PERFORMANCE statement appropriate to prepare the and sensitivity analysis including mitigating actions. In addition, in assessing

See page 32 for financial statements on a the Group’s longer-term viability we considered outputs of the annual corporate further information. going concern basis and planning processes including the strategic review, a three-year business plan and explain how they have a rolling re-forecast of current year business performance and prospects. We also

assessed the prospects considered the resilience of the Group to the potential impact of the Group’s principal of the Company over a risks and mitigating actions. We reviewed the period covered by the statement longer period. and concluded that three years remains the most appropriate period, being that

used by the Group for its business plan. GOVERNANCE

We concluded that it was appropriate to prepare the financial statements on a going concern basis and that the Board has a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period to September 2019.

5 Revenue In common with all Discussions were held with management and PwC and the Committee was satisfied recognition companies, there is a risk that the Group’s criteria for revenue recognition were appropriate. No breaches of the FINANCIALS See note 1 for that arrangements could be Group’s revenue recognition policy were brought to the Committee’s attention. further information. made to recognise sales that do not meet revenue

recognition criteria.

6 Taxation The Group is subject to We received and discussed reports from management in respect of the taxation

See notes 8 and 21 taxation in a number of affairs of the Group, including the tax audit in France and the potential impact for further information. jurisdictions, and significant on the Group of various UK and foreign taxation reform proposals. Additional judgement is required in tax disclosures have been included in the financial statements to provide more

relation to taxation clarity of the basis of tax provisioning. Following consideration and discussion provisions which could of management’s reports and a review of reports provided by PwC, we are materially affect the Group’s satisfied that the taxation provisions and their disclosure are appropriate. reported results.

7 Tobacco- The Group is exposed to We considered reports from the Group’s external lawyers which confirmed that related litigation arising from the Group continues to have meritorious defences to the actual and threatened legal litigation claimants alleging smoking- proceedings and concluded that risks in respect of tobacco-related litigation are

See page 49 for related health effects. appropriately disclosed in the Annual Report and Accounts. further information.

RISK MANAGEMENT AND INTERNAL CONTROL (FRC) associated Guidance on Risk Management, Internal Control The Group’s risk management approach has further evolved in the and Related Financial and Business Reporting. year, to manage risks arising from the changing legal, regulatory, Assurance over compliance with Group risk management policies, macro-economic and commercial environments in which the Group standards and requirements is achieved through the work of our operates. The continuation of the programme to further embed risk Internal Audit department and the execution of the Audit Committee management within our operations is enabling greater consistency approved annual plan of reviews to be completed. Issues arising from in the identification, assessment and mitigation of risks at both a these reviews are reported to the Committee, along with updates on local and Group level. the timely resolution of all issues raised in Internal Audit reports.

The Committee received regular updates during the year on The Group continues to evaluate the changing risks to its the continued development and implementation of the risk information security, and has engaged subject matter experts management framework and on the risk management systems to develop its approach to monitoring, evaluation and mitigation and processes operating within the Group. Additionally, the of the key causes of the risk. Our people have been provided with Committee has reviewed the process for identification, assessment training and guidance to enable effective operational management and reporting of the Company’s principal risks set out on pages 28 to of risks, with independent assurance of compliance to Group 31. The Committee has also considered and confirmed to the Board requirements provided by the risk-based reviews completed that this work is in accordance with the provisions in the 2014 UK as part of the Internal Audit plan. Corporate Governance Code and the Financial Reporting Council’s

www.imperialbrandsplc.comwww.imperialbrandsplc.com 41 THE BOARD AND ITS COMMITTEES AUDIT COMMITTEE CONTINUED

The above processes and those described in the Risk Management PwC, and its predecessor firms, has been the Company’s auditors section on pages 26 to 27 enable the Board, either directly or through since 1996. In line with our Auditor Independence policy, the Group the Audit Committee, to review regularly the effectiveness of the key Audit Partner is required to rotate after a maximum of five years procedures which have been established in order to provide appropriate (seven years for subsidiary companies). John Maitland, our Audit internal controls. They also enable the Board to confirm that an Partner, has been in post since 2013. ongoing process for identifying, evaluating and managing the PwC may only provide non-audit services where those services do Group’s principal risks has operated throughout the year and up not conflict with its independence. The policy establishes a formal to the date of approval of the Annual Report and Accounts. authorisation process, including the tendering for individual non- audit services expected to generate fees in excess of £250,000, and INTERNAL AUDIT pre-approval by the Committee for allowable non-audit work that Internal Audit (IA) has continued to evolve and develop its practices they may perform. Guidelines for the recruitment of employees or in order to continually improve the independent challenge to the former employees of PwC, and for the recruitment of our employees Group’s activities, required by the Audit Committee and management. by PwC, are contained in the policy. During the year all legacy internal auditing and assurance activities During the year PwC undertook non-audit work. This non-audit work performed across the Group have been brought under the IA function. was awarded to PwC due to its knowledge of the Group and it being In addition, the internal audit of our new USA subsidiary, ITG Brands, deemed best placed to provide effectively the services required. has been integrated within Group IA. IA continues to perform a risk based audit programme aligned to the Group’s strategic priorities. This non-audit work included:

The Audit Committee reviews the annual IA plan, including its scope – tax advisory and tax compliance work and extent, and reviews reports from IA at each quarterly Audit – verification of our corporate social responsibility reporting Committee meeting to monitor the function’s achievements against and underlying processes plan. The Audit Committee considered the results of the audits – agreed upon processes in respect of the performance criteria undertaken by IA and monitored management responses to the of our employee share plans audit matters raised. IA satisfaction surveys are completed by relevant management following each audit and feedback on In the current year non-audit fees were 37 per cent (2015: 87 per cent) IA performance during the year has been positive. of total audit fees (see note 4 on page 92). The 2015 ratio was significantly impacted by the work undertaken in connection with IA conducted a self-assessment of effectiveness against the best the USA cigarette brands and e-cigarette acquisition. The Committee practice standards of both the Institute of Internal Auditors (IIA) considers that the level of non-audit fees is appropriate in the light and the Institute of Chartered Accountants of England and Wales of the above activities, and is comparable with those disclosed by (ICAEW). Whilst highlighting some areas for continual improvement similar companies with international activities, and does not believe the self-assessment reflected an improving level of IA performance. that the objectivity of the external audit has been impaired as a result of this non-audit work. EXTERNAL AUDIT To ensure compliance with this policy, during the year the During the year, the Audit Committee reviewed the external audit Committee carried out two auditor independence reviews including strategy including the key issues to be addressed. The Committee consideration of the remuneration received by PwC for audit reviewed PwC’s proposed audit approach, scope and materiality services, audit-related services and non-audit work. The Committee thresholds for the Half-Year Report and for the audit of the consolidated also considered reports by both management and PwC which financial statements for the year ended 30 September 2016. did not raise any concerns in respect of PwC’s independence The Committee noted that PwC’s identified significant audit risks and confirmed that PwC maintains appropriate internal safeguards were similar to previous years, but with acquisition accounting to ensure its independence and objectivity. The outcome of these moved back to a normal level of risk following the completion reviews was that performance of the relevant non-audit work of the USA acquisition in 2015. by PwC was in compliance with the policy and was the most cost-effective way of conducting our business. No conflicts of The Audit Engagement Letter detailing the revised agreement for interest were found to exist between such audit and non-audit the provision of statutory audit and half year review services was work. The Committee, therefore, confirmed that the Company considered and approved. and Group continue to receive an independent audit service. INDEPENDENCE OF OUR EXTERNAL AUDITORS In order to ensure the independence and objectivity of PwC, the Committee maintains and regularly reviews our Auditor Independence policy. This policy provides clear definitions of services that our external auditors may and may not provide and can be found on our website. Following the FRC’s publication of the Revised Ethical Standard in June 2016 the policy was updated to embed audit tendering and rotations requirements, further extend the list of prohibited services and prohibit gifts and hospitality by or to the auditors. The updated policy has been applied from 1 October 2016.

42 Imperial Brands Brands PLC| Annual | Annual Report Report and and Accounts Accounts 2016 OVERVIEW

AUDIT QUALITY STATEMENT OF AUDITORS’ RESPONSIBILITIES We place great importance on ensuring that we receive a high PwC is responsible for forming an independent opinion on the standard and effective external audit. To assist the Committee to financial statements of the Group as a whole and on the financial assess the performance of our external auditors, during the year audit statements of Imperial Brands PLC as presented by the Directors. STRATEGY effectiveness questionnaires, covering the audit scope and planning, In addition, it also reports on other elements of the Annual Report as quality and delivery, challenge and communication and independence, required by legislation or regulation and reports its opinion to members. were completed by members of both the Committee and Logista’s Turn to pages 75 and 120 Audit Committee as well as by senior managers and finance for further details on PwC’s opinions executives from across the Group. Responses indicated that, as with previous reviews, there was a consistently high perception of auditor AUDITORS AND DISCLOSURE effectiveness, with no pervasive Group-wide concerns identified. OF INFORMATION TO AUDITORS The FRC’s Audit Quality Review Team (AQRT) issued its report PERFORMANCE Each of the Directors in office at the date of approval of this Annual on PwC’s audit of the Group for FY15. The Committee reviewed Report confirms that: the findings and discussed them with PwC, and matters raised were included in the planning for the year-end audit. – so far as they are aware, there is no relevant audit information (that is, information needed by PwC in connection with preparing Based on its consideration of the responses, together with its own its report) of which PwC is unaware; and ongoing assessment, for example through the quality of PwC’s reports to the Committee and its interaction with the Group Audit – each has taken all the steps that they ought to have taken as a Partner, and taking into account the AQRT inspection report, the Director in order to make himself/herself aware of any relevant GOVERNANCE Committee remains satisfied with the efficiency and effectiveness audit information and to establish PwC is aware of that information. of the audit. The Board accepted, at its November 2016 meeting, the Committee’s recommendation to put to shareholders at the forthcoming AGM APPROACH TO AUDIT TENDER a resolution to reappoint PwC as auditors to the Company.

Following the introduction of the audit tendering provisions in the Code, the Committee annually considers if the audit should be put out to tender. The result of this year’s review was not to put the audit

out to tender. The audit has not been put to tender since PwC were FINANCIALS appointed as the Company’s auditors in 1996.

The Committee has determined that, subject to its annual reviews, the likely timing of the audit tender will be in the year ending 30 September 2021 so that the incoming external audit firm can take up the role for the year ending 30 September 2023.

The Committee believes that this timeframe for the audit tender is in the best interests of the Company and its members given the ongoing medium-term projects involving significant changes to the Group’s operating model including the migration to finance shared services.

We believe it is in the interest of both the Group and its stakeholders to ensure that the pool of major accountancy firms with the capacity to be appointed as external auditor is maximised. As part of our tender planning we have, therefore, established a number of processes including the pre-approval of any future services by appropriate accountancy firms to maintain an adequate level of independence to allow them to tender. During the auditor independence reviews detailed above, we also considered the remuneration for audit services, audit-related services and non- audit work undertaken by such accountancy firms.

There are no contractual or similar obligations restricting the Group’s choice of external auditors.

The Company confirms that it has complied with the provisions of the Competition and Market Authority’s Order for the financial year under review.

www.imperialbrandsplc.comwww.imperialbrandsplc.com 43 DIRECTORS’ REPORT

APPLICATION OF THE UK Our NEDs play a key role in corporate accountability and CORPORATE GOVERNANCE CODE governance through their membership of the Board’s Committees. The latest revision of the UK Corporate Governance Code (the Code) The membership and remit of each Committee are considered was published by the FRC in September 2014, together with on pages 37 to 39 and 51. The open atmosphere at our Committee Guidance on Risk Management, Internal Control and Related meetings enables our NEDs to use their judgement, experience and Financial and Business Reporting. independence to review critically and, where appropriate, challenge constructively strategies proposed by management. This ensures We are pleased to confirm that the Company has complied in full the further development of our business, effective use of our with the Code throughout this financial year. The Company has resources and maintenance of our high standards of conduct. not, however, tendered for audit services in the last ten years.

We detail below how, in practice, the Company has applied the Matters Reserved for the Board Code’s principles and complied with its detailed provisions. In order to retain control of key decisions the Board has adopted a schedule of matters on which it must make the final decision, THE BOARD AND ITS COMMITTEES including approval of the Group and parent company financial statements, the Group’s business strategy, the annual capital Each of our Board Committees has specific written terms of reference expenditure plan, major capital projects, major changes to the issued by the Board and adopted by the relevant Committee. All Group’s management and control structure, material investments Committee chairmen report on the proceedings of their Committee or disposals, risk management strategy, sustainability and at the next meeting of the Board and, where appropriate, make environmental policies, the appointment or removal of Directors recommendations to the Board. In addition, minutes of all Committee and the Company Secretary and treasury policies. meetings are circulated to Board members.

To ensure Directors are kept up-to-date on developing issues and to Division of Responsibilities of our Chairman and Chief Executive enhance the overall effectiveness of the Board and its Committees, Whilst retaining a close working relationship, our Chairman and our Chairman and Committee chairmen communicate regularly Chief Executive have clearly defined and separate responsibilities with the Chief Executive and other Executive Directors. divided between running the Board and the business. They speak regularly between Board meetings to ensure a full understanding of evolving issues and to facilitate swift decision making. They are responsible to our shareholders for the successful delivery of our strategy.

Board composition and roles

Chairman Mark Williamson Leads the Board and creates an environment that ensures there are strong links between the Board and our shareholders and management.

Mark met the independence criteria of the Code on appointment and there have been no significant changes to his external commitments subsequent to his appointment.

Chief Executive Alison Cooper Supported by the Executive Directors and the OPEX, has day-to-day management responsibility for the Group, for recommending the Group’s strategy to the Board and, once agreed, its implementation.

Alison and the Executive Directors actively promote the Group’s values, culture and high standards of conduct and behaviour which underpin our reputation and support the delivery of our sustainable sales growth.

Executive Directors Oliver Tant Support the Chief Executive in devising and implementing our strategy and overseeing the operations and development of the entire Group, in addition Matthew Phillips to specific responsibility for managing their own areas of the business.

Senior Independent Michael Herlihy Responsible for assisting the Chairman with effective shareholder communication Director and is available to them should they have any concerns which have not been resolved through the normal channels or if these channels are not appropriate. No such concerns were raised during the year.

Michael is available to our NEDs should they have any concerns which are not appropriate to raise with the Chairman or which have not been satisfactorily resolved by the Chairman.

He also acts as a sounding board for the Chairman and carries out the Chairman’s performance evaluation.

Non-Executive Therese Esperdy Evaluate information provided and challenge constructively management’s Directors David Haines viewpoints, assumptions and performance. They bring to the Board a diverse range Steven Stanbrook of business and financial expertise which complements and supplements the Karen Witts experiences of the Executive Directors. Malcolm Wyman

44 Imperial Brands Brands PLC| Annual | Annual Report Report and and Accounts Accounts 2016 OVERVIEW

Conflicts of Interest and Independence Committees also received briefings from PwC and New Bridge Street Directors are required to avoid situations where they have, or could respectively. No specific training needs were identified in 2016. have, a direct or indirect interest that conflicts, or possibly may To enable them to discharge their responsibilities, the Board and its conflict, with the Company’s interests. In accordance with the STRATEGY Companies Act 2006 (the Act), our Articles of Association allow the Committees are supplied with full and timely information, including Board to authorise potential conflicts of interest that may arise and detailed financial information. to impose such limits or conditions as it thinks fit. The Company Secretary is responsible for advising the Board, Directors are required to give notice of any potential situational through the Chairman, on matters of corporate governance. In and/or transactional conflicts, which are considered at the following addition, all Directors have access to the advice of the Company Board meeting and, if appropriate, situational conflicts are authorised. Secretary and, where appropriate, the services of other employees We do not allow any Director to participate in such considerations or for all governance and regulatory matters. to vote regarding their own conflicts. Independent professional advice is available to Directors, in appropriate PERFORMANCE The Board has considered and authorised a number of situations circumstances, at the Company’s expense. all of which relate to the holding of external directorships and have been entered in our Conflicts Register. No actual conflicts have Performance Evaluation been identified. The Board considers that these procedures To enhance the effectiveness of the Board, during the year it undertook operate effectively. an in-house review of its performance, that of its Committees and of individual Directors. As part of our annual review process, during the Board meeting in This review considered the overall functioning of the Board and its

September 2016 we reviewed and reconsidered all situations entered in GOVERNANCE the Conflicts Register and the Board is satisfied that the independence Committees, the balance and range of Directors’ skills, diversity, of those Directors who have external board appointments has not been succession planning and how the Board works as a unit. compromised. At this meeting, and taking into account the annual As part of the evaluation, the Chairman held meetings with the Board performance evaluation discussed below, the Board concluded NEDs to consider, amongst other things, the performance of the that all our NEDs continue to contribute effectively and constructively Executive Directors. to Board debate, demonstrate commitment to their role, challenge objectively and question management robustly and at all times have The Senior Independent Director also held separate meetings with the best interests of our shareholders in mind. We confirm, therefore, individual Board members and the Board as a whole, both without that, with the exception of our Chairman who met the independence the Chairman present, to consider the performance of the Chairman. FINANCIALS criteria of the Code on appointment, our NEDs remained independent The feedback obtained was collated into a report which was presented throughout the year as defined in the Code. to the Succession and Nominations Committee and the Board at their September 2016 meetings and helped inform the one-to-one External Appointments development discussions between the Chairman and each Director. NEDs, including the Chairman, may serve on a number of other boards provided they continue to demonstrate the requisite The evaluation showed that the Board and its Committees continue commitment to discharge effectively their duties. The Succession to function and perform effectively and neither significant areas and Nominations Committee reviews the extent of the NEDs’ other for concern nor any requirement to provide extra training for our interests throughout the year. The Board is satisfied that each of Directors were identified. The evaluation confirmed that all our the NEDs commits sufficient time to their duties in relation to the Directors have sufficient time, knowledge and commitment to Company. Each of the NEDs has confirmed they have sufficient contribute effectively to our Board and its Committees and that time to fulfil their obligations to the Company. they remain appropriately constituted.

The Board is supportive of Executive Directors and members of Areas identified for further consideration were continued focus the OPEX accepting non-executive directorships of other companies on succession, further discussion on the changing/emerging in order to widen their experience and knowledge for the benefit of risks facing the Group and ensuring the use of the Board’s time the Company. Accordingly, subject to the agreement of the Board, is optimised to ensure it focuses on where it can add the most Executive Directors and members of the OPEX are permitted to value and make the best use of the NEDs’ diverse skill set. accept one external non-executive board appointment and to The Board intends to undertake an externally facilitated evaluation retain any fees received from such appointment. during 2017.

Information and Training How we addressed the areas raised for consideration in the Following their appointment to the Board, Directors are briefed 2015 evaluation: on the legal and other duties they owe to the Company. Tailored Area for consideration How we addressed this area induction programmes are arranged which include industry-specific Potentially increasing the number Steven Stanbrook and Therese Esperdy training, visits to the Group’s businesses and meetings with senior of NEDs on the Board appointed to the Board management. They are also briefed on internal controls at both Increasing the NEDs’ Business planning sessions and head office and business unit level and provided with information understanding of the Group’s enhanced performance and strategy on relevant Company policies and governance related matters. priorities within its divisions presentations Ensuring the Board has adequate Agendas planned to ensure Board’s time Through its ‘NEDucation’ programme the Company is also committed time to consider appropriately all focused on matters requiring its attention to the continuing development of its NEDs in order that they may build matters requiring its attention and an extra Board meeting held on their expertise and develop their understanding of the business and the markets in which we operate. Insurance and Indemnities Through this programme ongoing training is available to NEDs to meet We have purchased and maintain appropriate insurance cover in their individual needs. We also provide regular briefings to all Directors respect of directors’ and officers’ liabilities. The Company has also on matters such as legislation and regulation changes and corporate entered into qualifying third party indemnity arrangements for the governance developments. Members of our Audit and Remuneration benefit of all its Directors in a form and scope which comply with the requirements of the Act. These indemnities were in force throughout the year and up to the date of this Annual Report. www.imperialbrandsplc.comwww.imperialbrandsplc.com 45 DIRECTORS’ REPORT CONTINUED

DIALOGUE WITH OUR INVESTORS

Geographical Analysis of Shareholders Shareholder Composition (as at 30 September 2016) (as at 30 September 2016)

UK – 56% Institutional – 86% USA – 28% Non-institutional – 6% Rest of Europe – 13% Retail – 3% Rest of the World – 3% Employees – 1% Miscellaneous – 4%

We aim to provide balanced, clear and transparent communications At the AGM our Chairman and Chief Executive give presentations which allow shareholders to understand how we see our prospects on our performance and current business activities and all Directors and the market environments in which we operate. make themselves available to meet shareholders after the conclusion of the formal business of the AGM. We maintain an active engagement with our key financial audiences, including institutional shareholders, debt stakeholders and sell-side To ensure compliance with the Code, at all general meetings analysts as well as potential shareholders. During the year we made separate resolutions are proposed on each subject and all resolutions regular presentations to, and had meetings with, institutional are put to a poll. At the AGM the number of proxy votes for, against investors in the UK, Europe, Canada and the USA to communicate and abstentions for each resolution are provided. Votes received at progress towards achieving our sales growth strategy and to answer the AGM are added to the proxy votes and the final results published questions. Throughout the year our senior management team through a Regulatory Information Service, on our website and presented at industry conferences organised by investor bodies and via OTCQX. investment banks for their institutional investor bases. Our Investor At our 2016 AGM we received votes representing approximately Relations team managed the interaction with these audiences and 78 per cent of our issued share capital (excluding shares held in provided additional regular presentations during the year. treasury at the date of the meeting). We hosted an investor day in June 2016 at our head office which Our next AGM will be held on Wednesday 1 February 2017, full details provided further details on the Group’s strategy, operations and of which are contained in the Notice of Meeting available on our value creation opportunities. The day comprised presentations by website and, where applicable, posted with this Report. the Chief Executive and other members of the senior management team, and focused on three themes: quality, agility and discipline. Quality – We continue to improve the quality of growth through our portfolio simplification programme and optimising our investment choices in brands and markets. Agility – Reducing complexity and streamlining the way we manage our brands and markets, combined with the changes we are making to our operating model, is creating a stronger, more agile and efficient organisation. Discipline – We maintain a disciplined approach to resource allocation and the efficient management of our cost and capital base. This underpins the effective deployment of cash to reinvest in the business, pay down debt and deliver returns to shareholders.

The primary means of communication with the majority of our shareholders is via our Annual Report and Accounts, Half-Year Report and website. These were supported by a combination of presentations, conference calls, one-to-one and group investor meetings.

NEDs, including our Senior Independent Director, were available throughout the year to meet with major shareholders if requested and are kept up-to-date with investor opinion.

We offer our shareholders the choice of submitting proxy votes, including abstentions, either electronically or in paper format and ensure our Annual Report and Accounts and Notice of the AGM are made available at least 20 working days prior to the meeting to allow shareholders time to consider them fully before submitting their proxy votes.

46 Imperial Brands Brands PLC| Annual | Annual Report Report and and Accounts Accounts 2016 OVERVIEW

OTHER INFORMATION – INTRODUCTION We have not received notification that any other person holds One of the Board’s primary responsibilities is to ensure the Company 3 per cent or more of our shares. is run in the best long-term interests of its shareholders and wider The share interests of the Directors, their families and any STRATEGY stakeholders. We believe this can only be achieved if the activities connected persons are shown on page 67. Other than as disclosed of the Group are supported by appropriate governance processes on page 59, there are no agreements between the Company and its applied across the Group. Directors or employees providing for compensation for loss of office These processes are illustrated below and in the individual or employment due to a takeover. Committee reports. Information concerning employees and their remuneration is In accordance with the UK Companies Act 2006 (the Act) the given in note 6 to the financial statements and in the Directors’ following items have been included in other sections of this Remuneration Report.

Annual Report: PERFORMANCE FINANCIAL RESULTS AND DIVIDENDS – a fair review of the business, as required by the Act, is included in the Strategic Report. The information in our Governance Report We include a review of our operational and financial performance, is included in this Directors’ Report by reference; current position and future developments in our Strategic Report: Strategy, Risks, Performance and Governance sections. – future developments in the business are included in the Chief Executive’s Statement; The profit attributable to equity holders of the Company for the – information relating to our people is included in the Rewarding financial year was 631 million, as shown in our Consolidated Income Workplace section; Statement. Note 3 to the financial statements gives an analysis of GOVERNANCE – our principal risks are detailed on pages 28 to 31; and revenue and operating profit. – the Directors of the Company during the financial year are listed An analysis of net assets is provided in the Consolidated Balance on pages 34 and 35. Sheet and the related notes to the financial statements.

We pay quarterly dividends. The first and second dividends for SHARE CAPITAL financial year 2016 were paid on 30 June 2016 and 30 September Details of our share capital are shown in note 24 to the financial 2016 respectively. The third dividend will be paid on 30 December statements. All shares other than those held in treasury are freely 2016 and, subject to AGM approval, the final dividend will be paid transferable and rank pari passu for voting and dividend rights. on 31 March 2017 to our shareholders on the Register of Members FINANCIALS at the close of business on 17 February 2017. The associated At our AGM on 3 February 2016 shareholder authority for the ex-dividend date will be 16 February 2017. buyback of up to 95,709,000 shares was obtained. The Directors have declared and proposed dividends as follows: As at 30 September 2016 we held 77,289,137 shares in treasury, which represented 7.46 per cent of issued share capital and had £ million 2016 2015 an aggregate nominal value of £7,728,914. Ordinary Shares Interim paid – June 2016, We have not cancelled these shares but hold them in a treasury 23.5p per share 225 204 shares reserve within our profit and loss account reserve and they Interim paid – September 2016, represent a deduction from equity shareholders’ funds. 23.5p per share 225 204 At 30 September 2016 we had been notified of the following interests Proposed interim – December 2016, in 3 per cent or more of our shares and there have been no changes 54.1p per share 516 468 to this information up to the date of this Annual Report. Proposed final – March 2017, 54.1p per share 516 468 Number of Percentage Total ordinary dividends, ordinary shares of issued (millions) share capital 155.2p per share (2015: 141.0p) 1,482 1,344 BlackRock Inc. 53 5.591 Capital Group Companies Inc. 48 5.001 Invesco Limited 47 4.942 Morgan Stanley Investment Management Limited 42 4.442 Franklin Resources Inc. 41 4.301

1. Indirect holding. 2. Direct holding.

www.imperialbrandsplc.comwww.imperialbrandsplc.com 47 DIRECTORS’ REPORT CONTINUED

RELATIONS WITH OTHER STAKEHOLDERS The ten credit agreements are: Charitable and Political Donations – a credit facilities agreement dated 15 July 2014 under which As part of our responsible approach and commitment to reinvesting certain banks and financial institutions make available to in society, we continued to support a number of communities in Imperial Brands Finance PLC and Imperial Brands Enterprise which we operate by allocating a central budget of £3.06 million Finance Limited: (a) committed acquisition credit facilities (2015: £2.55 million) to partnership and community investments, originally across three tranches of $4,100 million, $1,500 million in addition to in-kind activities including management time, and $1,500 million, for a maximum period of up to three years, four volunteering, gifts in-kind and localised activities. The central years and six years respectively; (b) committed credit facilities budget was greater than in 2015, as a number of scheduled partner originally of €1,000 million for a period of up to three years; and payments from the previous year were made during this financial (c) committed credit facilities in two tranches of €2,835 million year. Although difficult to quantify in monetary terms, our in-kind and £500 million for a period of five years. The Group has activities also increased in 2016 with the second year of our global subsequently either repaid, cancelled or extended certain of volunteering initiative, which achieved some 55,000 hours of these facilities, such that as at 30 September 2016 the following employees’ time in support of charitable activities. remained outstanding: $900 million acquisition credit facilities Through the UK Charities Aid Foundation we apportioned £1.86 until 12 June 2018, and committed credit facilities of, respectively, million to registered charities, supporting the Eliminating Child €350 million until 15 July 2017, €2,835 million until 15 July 2021 Labour in Tobacco Growing Foundation, our Altadis Foundation and £500 million until 15 July 2021; and a small number of UK charities. – eight deeds of counter-indemnity each dated 3 June 2014 made on substantially the same terms under which certain insurance We also apportioned £1.2 million to our leaf sustainability companies and financial institutions each make available to partnerships which seek to help rural tobacco growing communities, Imperial Tobacco Limited a surety bond, in each case issued predominantly in sub-Saharan Africa. In addition to our central on a standalone basis but in aggregate forming an amount of budget our local entities donated some £0.45 million to charitable £400 million, until 3 December 2019; and and community endeavours. – a credit facility agreement dated 9 June 2015 in which Bank More information on our approach to supporting community of America Merrill Lynch Limited makes available to Imperial livelihoods can be found on our website. Brands Finance PLC and Imperial Brands Enterprise Finance All charitable donations and partnership investments are subject Limited a committed credit facility of $300 million for a maximum to the requirements of our Code of Conduct. period of up to five years.

No political donations were made to EU political parties, In the event that any of the listed credit facility agreements are organisations or candidates (2015: Nil). This approach is aligned subject to any such repayment and cancellation, we would expect with our Group Policy and Code of Conduct. to replace these agreements with similar arrangements in order to satisfy the Group’s existing funding commitments, ongoing working Pension Fund capital and similar requirements, as well as its long-term and Our main pension fund, the Imperial Tobacco Pension Fund, is not strategic plans. controlled by the Board but by a trustee company, the board of which consists of five directors nominated by the Company, one director Imperial Brands Finance PLC (the Issuer) has issued bonds under nominated by employee members and two nominated by current a Euro Medium Term Notes (EMTN) Debt Issuance Programme and deferred pensioners. This trustee company looks after the (as noted below). The Company acted as guarantor. assets of the pension fund, which are held separately from those The final terms of this series of notes contain change of control of the Group and are managed by independent fund managers. provisions under which the holder of each note will, subject to any The pension fund assets can only be used in accordance with earlier exercise by the Issuer of a tax call, have the option to require the fund’s rules and for no other purpose. the Issuer to redeem or, at the Issuer’s option, purchase that note Turn to page 65 at its nominal value if: (a) any person, or persons acting in concert Further details are contained in our Remuneration Report. or on behalf of any such person(s) becomes interested in: (i) more than 50 per cent of the issued or allotted ordinary share capital Articles of Association of the Company; or (ii) such number of shares in the capital of The Company’s Articles of Association do not contain any the Company carrying more than 50 per cent of the voting rights entrenchment provisions and, therefore, may be altered or added normally exercisable at a general meeting of the Company; and (b) to or completely new articles may be adopted by special resolution as a result of the change of control, there is either: (i) a reduction to subject to the provisions of the Companies Act 2006. a non-investment grade rating or withdrawal of the investment grade rating of the notes which is not raised again, reinstated to or Significant Agreements That Take Effect, Alter or Terminate on replaced by an investment grade rating during the change of control Change of Control period specified in the final terms; or (ii) to the extent that the notes The agreements summarised below are those which we consider to are not rated at the time of the change of control, the Issuer fails to be significant to the Group as a whole and which contain provisions obtain an investment grade credit rating of the notes within the giving the other party a specific right to terminate them if we are change of control period as a result of the change of control. subject to a change of control following a takeover bid. The bonds issued in such manner are as follows:

The Group has ten credit facility agreements that provide that, – 15 September 2008 £600,000,000 8.125 per cent guaranteed notes unless the lenders otherwise agree, if any person or group of due 2024; associated persons acquires the right to exercise more than – 17 February 2009 £1,000,000,000 9 per cent guaranteed notes due 2022; 50 per cent of the votes at a general meeting of the Company, 24 June 2009 £500,000,000 7.75 per cent guaranteed notes due 2019; the respective borrowers must repay any outstanding utilisation – made by them under the respective facility agreement and the – 5 July 2011 €850,000,000 4.5 per cent guaranteed notes due 2018; total commitments under that facility agreement will be cancelled. – 26 September 2011 £500,000,000 5.5 per cent guaranteed notes due 2026;

48 Imperial Brands Brands PLC| Annual | Annual Report Report and and Accounts Accounts 2016 OVERVIEW

– 1 December 2011 €750,000,000 5 per cent guaranteed notes due 2019; Morocco – 28 February 2014 €1,000,000,000 2.25 per cent guaranteed notes In June 2015, a claim was filed in the Casablanca Court by the heirs due 2021; of a deceased individual against our Moroccan subsidiary, Société

Marocaine des Tabacs (SMT). The total amount of compensation STRATEGY – 28 February 2014 €650,000,000 3.375 per cent guaranteed notes sought was not specified. On 9 February 2016, the Casablanca Court due 2026; and found in favour of SMT and dismissed the claim. No appeal has – 28 February 2014 £500,000,000 4.875 per cent guaranteed notes been filed. due 2032.

Imperial Brands Finance PLC has also issued bonds in the United Argentina States of America under the provisions of Section 144a and SEITA has been notified of a claim filed in the Court of Buenos Aires Regulation S respectively of the US Securities Act (1933). The against Nobleza Piccardo by an individual smoker. Nobleza Piccardo has denied liability. Nobleza Piccardo manufactures and distributes Company acted as guarantor. PERFORMANCE two brands of cigarettes owned by SEITA in Argentina under the The final terms of this series of notes contain change of control terms of a Licence Agreement. Nobleza Piccardo has sought to provisions under which the holder of each note will, subject to any invoke an indemnity contained in the Licence Agreement, pursuant earlier exercise by the Issuer of a tax call, have the option to require to which SEITA is responsible for any product liability to third the Issuer to redeem or, at the Issuer’s option, purchase that note at parties. The amount claimed is AR$8,980,200. 101 per cent of its nominal value if: (a) (i) any person (as such term is used in the US Securities Exchange Act of 1934 (the Exchange Act)) The Netherlands becomes the beneficial owner of more than 50 per cent of the Reports in the public media indicate that a complaint has been Company’s voting stock; or (ii) there is a transfer (other than by lodged with the Public Prosecutor in the Netherlands directed at GOVERNANCE merger, consolidation or amalgamation) of all or substantially all the four major tobacco manufacturers, including Imperial Brands. of the Company’s assets and those of its subsidiaries to any person Neither Imperial Brands nor any of its subsidiaries or employees (as such term is used in the Exchange Act); or (iii) a majority of the has been charged by the Public Prosecutor in the Netherlands, members of the Company’s Board of Directors is not continuing in but Imperial Brands is monitoring developments. such capacity; and (b) as a result of the change of control, there is either: (i) a reduction to a non-investment grade rating or withdrawal To date, no action has been successful or settled in favour of any of the investment grade rating of the notes which is not raised again, claimant in any tobacco-related litigation against Imperial Brands reinstated to or replaced by an investment grade rating during the or any of its subsidiaries. Imperial Brands has been advised by its FINANCIALS change of control period specified in the final terms; or (ii) to the lawyers that it has meritorious defences to the legal proceedings set extent that the notes are not rated at the time of the change of out above. We will continue vigorously to contest all such litigation control, the Issuer fails to obtain an investment grade credit rating against us. of the notes within the change of control period as a result of the change of control. Update on E-Vapour-Related Litigation We are currently defending two e-vapour-related claims in the USA. The bonds issued in such manner are as follows: The first is a consolidation of two purported class actions (Diek and – 11 February 2013 $1,250,000,000 2.05 per cent guaranteed notes Whitney) seeking to recover unquantified damages, including due 2018; punitive damages. This action is subject to a pending motion to – 11 February 2013 $1,000,000,000 3.50 per cent guaranteed notes dismiss. On 1 November 2016, in response to a motion to dismiss due 2023; all claims, the Court granted the motion in part dismissing with prejudice all but one remaining claim. After a response to the single – 21 July 2015 $500,000,000 2.05 per cent guaranteed notes due 2018; remaining claim is filed, all further proceedings in the action will be – 21 July 2015 $1,250,000,000 2.95 per cent guaranteed notes due 2020; stayed until further order of the Court. Therefore, at this stage, the – 21 July 2015 $1,250,000,000 3.75 per cent guaranteed notes due value of the action is unquantifiable. 2022; and The second claim has been brought by the Center for Environmental – 21 July 2015 $1,500,000,000 4.25 per cent guaranteed notes due 2025. Health alleging violations of the California Safe Drinking and Toxic Enforcement Act. We answered the claim in December 2015 and Update on Tobacco-Related Litigation intend to defend it vigorously. Ireland In the Republic of Ireland, the number of tobacco-related claims has fallen to only five. In four of these cases, the claimants are deceased and their solicitors have been unsuccessful in their efforts to contact their families. The fifth case has been inactive since 2003 and can be assumed to have been abandoned. If any of these claims reactivate, it is very likely that they would be struck out on grounds of delay.

Italy We are currently facing two claims in Italy. The first is against Logista, which is the subject of a challenge on grounds of jurisdiction and the admission of evidence. This challenge was heard in 2006 but judgement is still awaited.

The second claim has been brought in the Court of Messina against Imperial Tobacco Italia and Reemtsma by two individuals claiming €800,000 in total. We have denied liability. The parties have filed their pleadings. A hearing is scheduled in February 2017 where the Judge will hear the parties’ arguments regarding their requests for oral and expert evidence.

www.imperialbrandsplc.comwww.imperialbrandsplc.com 49 DIRECTORS’ REPORT CONTINUED

OTHER INFORMATION – LISTING RULES The Directors are responsible for keeping adequate accounting For the purposes of LR 9.8.4R, the information required to be records that are sufficient to show and explain the Company’s disclosed by LR 9.8.4R can be found on the pages set out below: transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable Section Information Page them to ensure that the financial statements and the Directors’ (1) Interest capitalised Not applicable Remuneration Report comply with the Act and, as regards the (2) Publication of unaudited Not applicable Group financial statements, Article 4 of the IAS Regulation. financial information (4) Details of long-term 51, 57, 58, They are also responsible for safeguarding the assets of the incentive schemes 64 and 65 Company and the Group and hence for taking reasonable steps (5) Waiver of emoluments by a director Not applicable for the prevention and detection of fraud and other irregularities. (6) Waiver of future emoluments by a director 56, 57, 64, 65, The Directors are responsible for the maintenance and integrity 69 and 70 of the Company’s website. Legislation in the United Kingdom (7) Non pre-emptive issues of equity for cash Not applicable governing the preparation and dissemination of financial (8) Non pre-emptive issue by major Not applicable statements may differ from legislation in other jurisdictions. subsidiary undertakings (9) Listed subsidiary Not applicable Each of the Directors, whose names and functions are listed (10) Contracts of significance 48 and 49 on pages 34 and 35, confirms that, to the best of their knowledge: (11) Provision of services by a controlling shareholder Not applicable – the Group financial statements, which have been prepared in (12) Shareholder waivers of dividends See below accordance with IFRSs as adopted by the EU, give a true and (13) Shareholder waivers of future dividends See below fair view of the assets, liabilities, financial position and profit (14) Agreements with controlling shareholders Not applicable of the Group; and – the Strategic Report and the Directors’ Report include a fair review In respect of LR 9.8.4R (12) and (13) the trustee of the Imperial of the development and performance of the business and the Tobacco Group PLC Employee and Executive Benefit Trust and position of the Group, together with a description of the principal the Imperial Tobacco Group PLC 2001 Employee Benefit Trust risks and uncertainties that it faces. agrees to waive dividends payable on the Group’s shares it holds for satisfying awards under various Imperial Brands PLC share The Strategic Report and the Directors’ Report were approved plans. In accordance with Section 726 of the Act no dividends can and signed by order of the Board. be paid to the Company in respect of the shares it holds in treasury. STATEMENT OF DIRECTORS’ RESPONSIBILITIES The Directors are responsible for preparing the Annual Report, the Directors’ Remuneration Report and the Group and the parent John Downing Company financial statements in accordance with applicable 8 November 2016 law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Imperial Brands PLC Directors have elected to prepare the Group financial statements Incorporated and domiciled in England and Wales No: 3236483 in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union, and the parent Company financial statements in accordance with United Kingdom GAAP (United Kingdom Accounting Standards and Applicable Law). Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the parent Company and of the profit or loss of the Group for that period. In preparing these financial statements, the Directors are required to:

– select suitable accounting policies and then apply them consistently; – make judgements and accounting estimates that are reasonable and prudent; – state whether IFRSs as adopted by the European Union and applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Group and parent Company financial statements respectively; and – prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

50 Imperial Brands Brands PLC| Annual | Annual Report Report and and Accounts Accounts 2016 DIRECTORS’ REMUNERATION REPORT OVERVIEW REMUNERATION COMMITTEE

Remuneration Summary The Committee’s Aim Our remuneration policy incentivises management to deliver our strategy, building on the Company’s track record. STRATEGY

Our remuneration packages comprise:

Fixed elements Variable elements – salary – annual bonus – pension – long-term incentive plan – benefits

Turn to page 55 PERFORMANCE for further details of our remuneration policy

Remuneration is weighted towards performance related variable David Haines elements with targets aligned to the key performance indicators Chairman we use to measure the progress we make in delivering our strategy. Under the proposed remuneration policy the potential reward opportunity for Alison Cooper, our Chief Executive, in the 2017 “Our remuneration policy incentivises financial year is:

management to deliver against our GOVERNANCE strategic objectives.” Minimum 100% 1,657 Target 43% 27% 30% 3,889 Members David Haines Chairman Karen Witts Max 19% 25% 56% 8,486 Ken Burnett (to 3 February 2016) Malcolm Wyman Therese Esperdy (from 1 July 2016) Trevor Williams Actual FY16 29% 27% 44% 5,537 Michael Herlihy Committee Secretary £’000 0 2000 4000 6000 8000 10000 Steven Stanbrook (from 8 February 2016) FINANCIALS Salary, pension and benefits Other regular attendees Board Chairman1 Group Reward and Capability Annual bonus Chief Executive1 Director LTIP Group Company Secretary New Bridge Street, the 2 Group Human Resources Director1 Committee’s principal advisor Summary of Total Remuneration for each Executive Director (2016)

1. Specifically excluded when their own remuneration or conditions of service Share Share- are under discussion. Taxable Annual plans save Pension £’000 Salary benefits bonus vesting vesting benefits Total 2. Appointed by the Committee. Executive Directors Focus in 2016 Alison Cooper 1,020 17 1,469 2,441 – 590 5,537 – following the acquisition of assets in the USA, ongoing monitoring of performance conditions to ensure incentive pay-out levels Oliver Tant 649 17 934 986 – 169 2,755 appropriately reflect the intentions of the Committee and the Matthew Phillips remuneration policy at the time of grant 541 24 779 757 4 434 2,539 2,210 58 3,182 4,184 4 1,193 10,831 – use of discretion to increase revenue targets for in-flight LTIPs to mitigate the one off uplift from the acquisition of assets in the USA Turn to page 63 – one off increase in EPS and revenue targets for the FY16 LTIP to read the full details in our Remuneration Report. grant to mitigate the part year uplift from the acquisition of assets in the USA A Track Record of Out-performance – review of remuneration policy and positioning in light of the Execution of our strategy has resulted in Imperial Brands outperforming changed profile of the business following the successful USA the FTSE and delivering a total shareholder return of 212%, as set out acquisition, the Group’s strategic objectives and to address real in the chart below. concern regarding the Group’s ability to retain and attract executive talent Total Return Indices – Imperial Brands and FTSE 100

Focus for 2017 350 – consultation with major shareholders on proposed changes to the 300 remuneration policy in order to address real concern regarding 250 the Group’s ability to retain and attract executive talent – implementation of proposed changes 200 – ongoing monitoring of remuneration policy and performance 150 conditions to ensure they appropriately support and incentivise 100 delivery of the Group’s strategic objectives 2008 2009 2010 2011 2012 2013 2014 2015 2016

Imperial Brands FTSE 100

FTSE 100 Index for each of our financial year ends to 30 September 2016. We have chosen the FTSE 100 Index as it provides the most appropriate and widely recognised index for benchmarking our corporate performance over an eight-year period.

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DEAR SHAREHOLDER Consultation Our approach to remuneration aims to incentivise the delivery of To address this we developed proposals to increase the opportunity our strategy and create strong alignment between the interests of within our variable compensation and consulted many of our largest shareholders and senior management over the long term. investors. During this process I was very pleased to hear consistent strong support for our management team and their successful We achieve this by ensuring: execution of our strategy; as well as a shared understanding of the – the Group is able to attract and motivate the high calibre of issue we face on remuneration and support for addressing it. international executives required; There were divergent views on how this might best be achieved; – members of our executive team have the opportunity to earn many shareholders were supportive of the continued emphasis on competitive levels of reward for delivery of strong performance long-term variable pay, while others suggested increases to fixed in the context of the roles they perform; pay, either through higher base pay, or the use of restricted stock. – we have the appropriate performance measures to align executive and shareholder interests and expectations; and The use of restricted stock for Board executives in the UK remains at an early stage, and whilst we would not rule this out for the future, – executive remuneration is not excessive but is fair and our current preference is to increase the LTIP opportunity as this will competitive; in particular, we guard against rewards for failure. only increase pay if performance is delivered.

Our Performance Record Some investors also considered that an increase in pay opportunity In the six years since we introduced our current strategy we should be accompanied by higher performance targets. In our have significantly outperformed the FTSE 100, delivering a Total situation, a balanced approach is required since we are seeking to Shareholder Return (TSR) of 174 per cent (compared to the index address a significant shortfall in opportunity and the resulting pay over the same period of 55 per cent). for performance, and to increase performance levels too far would risk undermining our original intent. I am pleased to say that this strong performance continued over the last year. We successfully integrated the $7.2 billion acquisition of We therefore intend to raise the level of EPS performance required to brands and assets from Reynolds American in the USA, enhancing achieve maximum pay-out under the LTIP. However, we would not our footprint in one of the world’s most profitable tobacco markets. wish to disguise the fact that our proposals allow us to pay more for Our larger USA business, ITG Brands, made an excellent contribution the delivery of the levels of performance seen in recent years, and to our results in the year. We also further improved the quality of we believe this is entirely appropriate. our growth by increasing the contribution from our Growth and A number of shareholders raised a view that the weighting on Specialist Brands, which now account for 60.1 per cent of the Group’s EPS was quite high and could be replaced, in part, by operational tobacco net revenue. Our strong financial performance included measures. The possibility of increased shareholding requirements adjusted earnings per share growth of 12 per cent, cash conversion was also raised together with a post-exit shareholding requirement. of 95 per cent and dividend growth of 10 per cent. Both these points were taken on board by the Committee. Our performance resulted in an annual bonus pay-out for Executive I appreciate that we operate within a broader social context and Directors of 72 per cent of maximum opportunity. Our track record of recent years have seen a rise in concerns about executive pay in success over the longer term started to be reflected in the outcome general. We are sympathetic to concerns about pay increases which of the long-term plans, with vesting of approximately 59 per cent do not reflect performance. under the LTIP awards made in December 2013, and approximately 19 per cent vesting in respect of SMS awards made in February 2014. However, businesses such as ours are essential to the economy and it is in the interests of all our stakeholders that they should be The Issue We Face managed as well as possible to produce optimal performance. To that Despite this strong performance, the pay of our executive team has end, we believe it is right and necessary that our executive team has been significantly below the average for companies of our size for the opportunity to earn competitive levels of reward for delivery some time. I am concerned that if we do not address the situation, of strong performance. This change also provides headroom for we will be put at an unnecessary risk with regard to retaining our increases below executive level, where required, to attract and senior team, especially as we embark upon the next decade of our retain the talent necessary to drive the business forward. growth strategy.

Over the past three years we made a number of changes to our remuneration policy, which addressed part of the problem by bringing salaries into line with the market. At the same time we also strengthened governance through a shift towards long-term pay, the introduction of holding periods on vested shares and the strengthening of malus and claw back provisions.

However, when we look at overall levels of pay we continue to pay below competitive levels in the context of the very strong performance of the business. The underlying reason for this is that our variable pay opportunity falls short of that offered elsewhere.

52 Imperial Brands Brands PLC| Annual | Annual Report Report and and Accounts Accounts 2016 OVERVIEW

Proposed Changes for 2017 Following consultation with shareholders our proposal is to:

– increase the opportunity under our LTIP by 100 per cent STRATEGY of base salary; – increase the EPS target for maximum vesting from 8 per cent to 9 per cent growth per annum; – introduce cash conversion as a performance measure into the LTIP; – raise the shareholding requirement for the CEO from 300 per cent to 400 per cent of base salary; and

– introduce a post-exit shareholding requirement for the CEO of PERFORMANCE 100 per cent of base salary for two years.

As a result, our LTIP performance criteria reflect the key performance indicators aligned to our strategy: growth in revenue and earnings, the conversion of earnings to cash (supporting investment in our brands and our commitment to 10 per cent dividend growth) and the resulting creation of shareholder value.

In increasing the LTIP opportunity we are not seeking to address GOVERNANCE historic underpayment but are ensuring that our management team has the opportunity to earn competitive reward for continued high performance in future years.

The Committee will ensure that performance conditions remain stretching but realistic. Our recent history demonstrates that we have consistently upheld this principle; at the start of this year, the Committee used its discretion to increase revenue targets for all in- flight LTIPs to remove the positive impact of the USA acquisition to FINANCIALS ensure only organic growth is rewarded and, for one grant, increased the earnings per share and revenue targets in the 2016 LTIP grant to reflect the partial year uplift from the same acquisition.

For our 2017 financial year, we have made salary increases in line with the Company as a whole to two of the three Executive Directors. The Committee made a higher increase to the CFO to reflect both his increased responsibilities in an expanded role incorporating Group Procurement and Group Information Systems, and the competitive CFO market. Our expectation is that future increases, for all Executive Directors, will all be broadly aligned with those across the Company.

As I have said in previous reports, I am confident that we have built strong links between our reward programmes and the key performance indicators used to measure the progress in delivering our strategy. The changes we are now proposing strengthen both these links and our competitive positioning, to ensure we are able to retain our successful management team and recruit the next generation when the time comes. As such, we believe the changes we are proposing to our policy are very much in the best interests of both the Company and shareholders, and I look forward to your support.

David Haines Chairman of the Remuneration Committee

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GOVERNANCE The Committee’s full terms of reference provide further details of The Role of the Remuneration Committee the role and responsibilities of the Committee and are available on The Board recognises that it is ultimately accountable for executive our website. remuneration but has delegated this responsibility to the Committee. All members of the Committee are independent Non-Executive The Committee’s principal function is to support the Group’s strategy Directors which we consider fundamental in ensuring Executive by ensuring its delivery is incentivised by the remuneration policy. Directors’ and senior executives’ remuneration is set by people who It also determines the specific remuneration package, including are independent and have no personal financial interest, other than service contracts and pension arrangements, for each Executive as shareholders, in the matters discussed. Director and our most senior executives. To reinforce this independence, a standing item at each Committee The Committee held four meetings during the financial year. meeting allows the members to meet without any Executive Director or other manager being present. The Committee’s responsibilities include: This Report has been prepared in accordance with the provisions ensuring remuneration arrangements support our strategy, align – of the Companies Act 2006 (the Act) and The Large and Medium- with our values and drive performance; sized Companies and Groups (Accounts and Reports) (Amendment) – maintaining a competitive remuneration policy appropriate to Regulations 2013 (the Regulations). It also meets the requirements the business environment of the countries in which we operate, of the UK Listing Authority’s Listing Rules and the Disclosure and thereby ensuring we can attract and retain high calibre Transparency Rules. In this Report we describe how the principles individuals; of good governance relating to directors’ remuneration, as set out in – aligning senior executives’ remuneration with the interests of the UK Corporate Governance Code 2014 (the Code), are applied in long-term shareholders whilst ensuring that remuneration is practice. The Committee confirms that throughout the financial year fair but not excessive; the Company has complied with these governance rules and best – assessing the output from the Board evaluation process insofar practice provisions. as it relates to the Committee; The Regulations require our auditors to report to shareholders on – making recommendations to the Board in respect of our the audited information within this Report and to state whether, Chairman’s fees; in their opinion, the relevant sections have been prepared in – setting targets for performance related elements; accordance with the Act. The auditors’ opinion is set out on page – oversight of our overall policy for senior management 75 and we have clearly marked the audited sections of the Report. remuneration and of our employee share plans; and – ensuring appropriate independent advisors are appointed to provide advice and guidance to the Committee.

Remuneration Committee Meetings Held in the 2016 Financial Year Four Committee meetings were held in the 2016 financial year and included the following matters on the agenda:

Oct Apr Jun Sept – Directors’ Remuneration – Review of terms of reference – Review of proposals for – Market practice update Report – AGM voting and shareholder remuneration policy – Potential outturn for FY16 – FY15 Bonus payments feedback – Investor communications bonus, LTIP and SMS – FY16 Bonus target finalisation – Update on remuneration for proposed policy – Update on policy proposals and – LTIP – satisfaction of governance FY17 salary and incentive vesting criteria – Review of remuneration structures – LTIP 2016 grant and policy – Review of Chairman’s fees performance criteria – SMS – lapsing of Directors’ award as vesting criteria not met – Approval of 2016 Sharesave grant

54 Imperial Brands Brands PLC| Annual | Annual Report Report and and Accounts Accounts 2016 OVERVIEW

Remuneration Policy for Executive Directors Our strategy and business model drive our remuneration policy. Our policy is designed to offer competitive, but not excessive, base salary, with significant weighting towards performance-based elements, the measures of which incentivise and support the delivery of our strategy

whilst also reflecting individual, functional and corporate performance. We aim to set and rigorously apply targets that are both stretching STRATEGY and achievable.

As stated earlier in this Report, we reviewed our remuneration policy in 2016. As a result of this review and shareholder feedback received during consultation, we have revised the remuneration policy. The changes to our policy are summarised in the table below and the rationale for these changes is set out in the letter from the Chairman of the Remuneration Committee on pages 52 and 53. Other elements of our remuneration policy have not changed.

Element Previous policy New policy PERFORMANCE Maximum No maximum for base salary. Whilst there is no maximum salary or maximum increase in salary salary / the Committee would only set a salary which exceeded the top quartile Maximum of salaries of the comparator group in unforeseen and exceptional increase in circumstances. salary

Long-Term Maximum award sizes: Maximum award sizes: Incentive

Chief Executive Officer: 350% of base salary. Chief Executive Officer: 450% of base salary. GOVERNANCE Plan maximum Other Executive Directors: 250% of base Other Executive Directors: 350% of base salary or such lower sum award sizes salary or such lower sum as determined by as determined by the Committee. the Committee.

Chief The Chief Executive is expected to build a holding The Chief Executive is expected to build a holding broadly equivalent to Executive broadly equivalent to 300 per cent of base salary 400 per cent of base salary over a period of five years from appointment. shareholding over a period of five years from appointment. guidelines FINANCIALS

Post exit No requirement. The CEO will have a post exit shareholding requirement of 100 per cent shareholding of salary for two years post exit. requirement

It is intended that the remuneration policy set out in this Report will, if approved, for the purposes of section 226D(6)(b) of the Act, take effect immediately after the AGM on 1 February 2017.

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Remuneration Policy for Executive Directors Element Purpose and link to strategy Operation Maximum opportunity

Salary Attract and retain high Reviewed, but not necessarily increased, annually by the Committee taking Whilst there is no performing individuals, into account each Executive Director’s performance together with changes maximum salary or reflecting market value in role and responsibility. maximum increase of role and the Executive in salary, the Salary increases, if any, are generally effective from 1 October. Director’s skills, Committee would experience and The Committee considers pay data for UK listed companies closest to us by only set a salary performance. FTSE ranking (and excluding those in the financial services sector). These which exceeded the comparators serve to define a “playing field” within which an individual’s top quartile of salaries reward needs to be positioned. In determining individual remuneration, the of the comparator primary factors taken into account are individual performance, the scale of group in unforeseen the challenges intrinsic to that individual’s role, their ability and experience. and exceptional circumstances.

The Committee takes into account each Executive Director’s performance, together with changes in role and responsibility and considers general increases for the UK wider management population.

Benefits Competitive benefits Benefits include provision of company car, health insurance, life insurance The level of benefit taking into account and permanent health insurance which are provided directly or through provision is fixed. market value of role and the Company pension scheme. benefits offered to the Opportunity to join the Sharesave Plan. wider UK management population. Provision of relocation assistance upon appointment if/when applicable.

Annual Incentivise delivery of At least 60% of the annual bonus will be linked to key financial metrics 200% of base salary Bonus Group strategic objectives and no more than 15% will be linked to individual measures. or such lower sum Plan and enhance as determined by Performance below the threshold results in zero payment. Payments rise performance, including the Committee. from 0% to 100% of the maximum opportunity for levels of performance against the indicators between the threshold and maximum targets. we use to measure our performance as detailed Half of any annual bonus paid would be in deferred shares to be held for on pages 6 and 7. a minimum of three years, with the other half paid in cash.

Malus provisions apply before payment and claw back provisions are in place for the three years following payment of annual bonus. The deferred shares are not subject to performance conditions.

Share Incentivise the delivery The award granted in February 2014 was the last in which Executive Maximum match is Matching of Group strategic targets. Directors were eligible to participate. However, these outstanding awards 1:1 on shares invested Scheme Promote share ownership will vest in February 2017 in line with the achievement of the relevant plus dividend (no further worldwide across the performance conditions. equivalents. awards to Imperial Brands The three-year award had performance conditions based on financial be made to management team. measures with underpins. In respect of each element, performance below Executive threshold target results in zero vesting. Vesting of each performance Directors) element starts at 25% and rises to 100% for levels of performance between threshold and maximum.

There is no opportunity to retest and claw back provisions are in place. Dividends accrue on vested shares and will be paid on vesting in February 2017.

56 Imperial Brands Brands PLC| Annual | Annual Report Report and and Accounts Accounts 2016 OVERVIEW

Remuneration Policy for Executive Directors continued Purpose and link Element Operation Maximum opportunity to strategy

Long-Term Incentivise long-term Awards granted during or after January 2015 Chief Executive STRATEGY Incentive Group financial Officer: 450% of Awards have a performance period of three financial years starting at the Plan performance in line base salary. beginning of the financial year in which the award is made and are based with the Group’s 20% on relative Total Shareholder Return (TSR) vs a peer group and 80% on Other Executive strategic objectives, financial measures. Directors: 350% of base including against salary or such lower the indicators we In respect of each performance element, performance below the threshold sum as determined use to measure our target results in zero vesting. Vesting of each performance element starts by the Committee. performance as at 25% and rises to 100% for levels of performance between the threshold PERFORMANCE detailed on pages and maximum targets. Plus shares equivalent 6 and 7, and long-term to the value of the There is no opportunity to re-test. shareholder returns. dividend roll-up. Claw back and malus provisions are in place.

Dividend equivalents accrued on vested shares are paid at the time Align Executive of vesting. Directors’ interests with those of long- Any awards which vest will be subject to a further two-year holding GOVERNANCE term shareholders. requirement.

Awards granted November 2013 Awards have a performance period of three financial years starting at the beginning of the financial year in which the award is made and are based 50% on TSR vs a peer group and 50% on financial measures with underpins.

In respect of each performance element, performance below the threshold

target results in zero vesting. Vesting of each performance element starts FINANCIALS at 25% and rises to 100% for levels of performance between the threshold and maximum targets.

There is no opportunity to re-test.

Claw back provisions are in place.

Dividends accrued on vested shares are paid at the time of vesting.

Pensions Attract and retain Pension provision for Executive Directors is provided in line with other Current policy is for high performing employees through the Imperial Tobacco Pension Fund in the UK (the Fund). a defined contribution Executive Directors. Executive Directors who joined the Fund prior to 1 October 2010 are members and cash supplement of the defined benefit section whereas Executive Directors joining the Fund limit of 26% of salary. on or after this date are offered membership of the defined contribution Existing members section. Executives have the option to receive a cash supplement in lieu of of the defined benefit membership of the Fund, or in lieu of accrual on pensionable salary above section have a cash in the Fund’s earnings cap, or in lieu of future service accrual. lieu of pension accrual Members of the defined benefit section of the Fund accrue pension at a rate limit of 35% of salary. between 1/47th and 1/60th of pensionable salary. Further detail is provided in the Annual Report on Remuneration on pages 65 and 66.

The rules of the Fund detail the pension benefits which members can receive on retirement, death or leaving service.

The Committee may amend the form of any Executive Director’s pension arrangements in response to changes in pensions’ legislation or similar developments, so long as any amendment does not increase the cost to the Company of an Executive Director’s pension provision.

Note: Legacy awards – Subject to the achievement of applicable performance conditions, Executive Directors remain eligible to receive payments, and existing awards may vest, in accordance with the terms of any such award (including under the Share Matching Scheme, outlined on page 56) made prior to the approval and implementation of the remuneration policy.

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Committee Discretions Relating to Variable Pay Schemes The Committee operates each of the Company’s incentive plans for which it has responsibility according to their respective rules and, where relevant, in accordance with the Listing Rules. The Committee has discretion, consistent with market practice, in respect of, but not limited to:

– participants; – the timing of grant of an award and/or payment; – the size of an award (subject to the maxima set out in our policy); – the performance measures and targets; – the determination of vesting and confirmation that the calculation of performance is made in an appropriate manner, with due consideration of whether and, if so, how adjustments should be made (subject to the provision that any adjustments to targets set should result in the revised target being no less challenging than the original target); – discretion required when dealing with a change of control and any adjustments required in special circumstances (e.g. rights issues, corporate restructuring events and special dividends); and – determination of a good/bad leaver for plan purposes based on the rules of the plan and the appropriate treatment chosen. In relation to the Annual Bonus, LTIP and legacy SMS awards, the Committee retains the ability to adjust the targets set if events occur which cause it to determine that the conditions are no longer appropriate and amendment is required so that the conditions achieve their original purpose and are not materially less difficult to satisfy than was intended. Adjustment may also be made for any changes to accounting policy over the performance period. Any use of discretion beyond the normal operation of the plan would be justified in the Annual Report on Remuneration and, if appropriate, be subject to consultation with the Company’s major shareholders. The use of discretion in relation to the Company’s Sharesave plan is as permitted under HMRC rules.

In the past two years the Committee has exercised its discretion on two occasions; both of these were to increase targets within the LTIP in order to reduce payments following the acquisition of USA assets, in order to ensure that the rewards received by the management team were in line with the Committee’s original intentions when it set the performance criteria. The Committee will continue to review targets to ensure they reflect its original intentions, and this may include any discretion required due to the impact of the recently announced strategic investments.

Payments from Existing Awards Subject to the achievement of applicable performance conditions, Executive Directors are eligible to receive payment, and existing awards may vest, in accordance with the terms of any such award made prior to the approval and implementation of the remuneration policy detailed in this Report.

Performance Measure Selection The measures used under the annual bonus plan are selected annually to reflect the Group’s key strategic initiatives for the year and reflect both financial and non-financial objectives.

The Committee reviews the performance measures annually and whilst it still considers adjusted EPS, net revenue and relative TSR to be appropriate measures of long-term performance for the Group, it has introduced a cash conversion measure to increase the focus on the financial discipline required to support our ongoing investment behind our growth strategy and our dividend commitment. TSR aligns with the Company’s focus on shareholder value creation and rewards management for out-performance of sector peers. EPS provides strong line-of-sight for Executive Directors and supports the Group’s long-term strategy. Net revenue supports the Company’s focus on organic growth.

Performance measures are set to be stretching and achievable, taking into account the Company’s strategic priorities and the economic environment.

Remuneration Policy for Other Employees The Company’s approach to annual salary reviews is consistent across the Group, with consideration given to the scope of the role, level of experience, responsibility, individual performance and pay levels in comparable companies.

All managers are eligible to participate in an annual bonus plan with similar metrics to those used for the Executive Directors. Other employees are eligible to participate in performance led annual bonus plans. Opportunities and specific performance conditions vary by organisational level with business area-specific metrics incorporated where appropriate.

Senior executives are eligible to participate in the LTIP (c.55 individuals) and the majority of members of the Corporate Management Group are eligible to participate in the SMS (c.1,000 individuals).

58 Imperial Brands Brands PLC| Annual | Annual Report Report and and Accounts Accounts 2016 OVERVIEW

TOTAL REMUNERATION OF THE EXECUTIVE DIRECTORS FOR A MINIMUM, TARGET AND MAXIMUM PERFORMANCE Total Remuneration by Performance Scenario for 2016/17 Financial Year STRATEGY £’000 Chief Executive Officer £’000 Chief Financial Officer £’000 Chief Development Officer 10000 5000 £4,750 5000 £8,486 52% £4,070 8000 4000 4000 56% 48%

6000 3000 3000 £2,211 PERFORMANCE 4000 £3,889 £2,055 2000 28% 29% 2000 24% 27% 30% 25% 32% 2000 £1,012 27% £1,657 27% 1000 £898 1000 100% 49% 25% 100% 43% 19% 100% 40% 19% 0 0 0 Minimum Target Max Minimum Target Max Minimum Target Max Salary, pension and benefits Annual bonus LTIP GOVERNANCE The charts are indicative as share price movement and dividend accrual have been excluded. Assumptions made for each scenario are as follows:

– Minimum: fixed remuneration only (i.e. salary, benefits and pension). – Target: fixed remuneration plus half of maximum annual bonus opportunity plus 25 per cent vesting of LTIP awards. Note that Imperial Brands does not have a stated ‘target’ for either its financial measures or incentive pay-outs. – Maximum: fixed remuneration plus maximum annual bonus opportunity plus 100 per cent vesting of LTIP awards.

Executive Directors’ Service Agreements and Loss of Office Payments FINANCIALS The Company’s policy is that Executive Directors’ service agreements normally continue until their agreed retirement date or such other date as the parties agree, are terminable on no more than one year’s notice and contain no liquidated damages provisions nor any other entitlement to the payment of a predetermined amount on termination of employment in any circumstances. In addition, in some limited cases career counselling may be provided after the cessation of employment for a defined period. Under the terms of our Articles of Association, all Executive Directors are subject to annual re-election by shareholders.

Executive Directors’ service agreements contain provisions for payment in lieu of notice in respect of base salary, pension contributions and 5 per cent of base salary in respect of other benefits but these are at the Committee’s sole discretion. The Company is unequivocally against rewards for failure. The circumstances of any termination (including performance) and an individual’s duty and opportunity to mitigate losses would be taken into account in every case; our policy is to stop or reduce compensatory payments to former Executive Directors to the extent that they receive remuneration from other employment during the compensation period and any such payments would be paid monthly in arrears.

For Executive Directors leaving employment for specified reasons (including death, redundancy, retirement, ill health and disability, the business or company in which they are employed ceasing to be part of the Group or on a change of control) annual bonus awards will be based on performance, adjusted for time served, and paid at the same time as for other employees. The Committee has discretion to adjust the timing and pro-rating to take account of any prevailing exceptional circumstances.

Under the rules of both the LTIP and the legacy SMS, outstanding awards vest if a participant leaves for the specified reasons as detailed above. In these circumstances awards vest as the Committee determines having regard to the time the award has been held and the achievement of the performance criteria. Awards will vest either on termination of employment or, for awards granted under the policy approved by shareholders in 2014 and under the proposed policy, at the normal vesting date, as the Committee determines in its absolute discretion. If the termination of employment is not for one of the specified reasons and the Committee does not exercise its discretion to allow an award to vest, awards lapse entirely.

Executive Directors’ Service Agreements Compensation on termination following Executive Directors Date of contract Expiry date a change of control Alison Cooper 1 July 2007 Terminable on 12 months’ notice No provisions Oliver Tant 1 October 2013 Terminable on 12 months’ notice No provisions Matthew Phillips 31 May 2012 Terminable on 12 months’ notice No provisions

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Recruitment of Executive Directors The remuneration package for a new Executive Director would be set in accordance with the terms of the approved remuneration policy in force at the time of appointment. The Committee may offer additional cash and/or share-based elements when it considers these to be in the best interests of the Company and, therefore, shareholders. Any such buyout awards would be based solely on remuneration lost when leaving the former employer and would reflect the delivery mechanism (i.e. cash, shares, options), time horizons and performance requirements attaching to that remuneration. Shareholders will be informed of any such awards at the time of appointment. The Committee may need to avail itself of the current Listing Rule 9.4.2 R if required in order to facilitate, in unusual circumstances, the recruitment or retention of the relevant individual. The Committee confirms that this provision would only be used to compensate for remuneration lost.

In the case of an internal appointment, any variable pay element awarded in respect of the prior role may be allowed to pay-out according to its terms on grant. In addition, any other ongoing remuneration obligations existing prior to appointment may continue, provided that they are put to shareholders for approval at the first AGM following their appointment.

For external and internal appointments, the Committee may agree that the Company will meet certain relocation expenses, as appropriate and within the limits set by the Committee.

Shareholding Guidelines Whilst placing significant weight on annual performance, our policy aligns the interests of shareholders and other stakeholders with those of management by incentivising the growth in the value of the business over the long term. To support this alignment, we have share ownership guidelines as we believe Executive Directors and other senior managers should be encouraged to hold a substantial portion of their personal wealth in our shares.

Over a period of five years from appointment, Executive Directors are expected to build a holding in the Group’s shares to a minimum value broadly equivalent to 400 per cent of salary (increased from 300 per cent) for the Chief Executive and 300 per cent for other Executive Directors. Other senior management are expected to invest at a level equivalent to between once and twice base salary, dependent upon grade. Failure to meet the minimum shareholding requirement is taken into account when determining eligibility for LTIP awards.

The Committee is also introducing a post-exit shareholding requirement for the Chief Executive of 100 per cent of salary for two years post-exit.

Non-Executive Directors do not have a shareholding requirement but are required to invest a minimum percentage of their fees in shares which they are required to retain for the duration of their appointment.

Consultation with Employees Although the Committee does not consult directly with employees on the remuneration policy, the Committee does consider the general base salary increase, remuneration arrangements and employment conditions for the broader employee population when determining the remuneration policy for Executive Directors.

Differences in Remuneration Policy for Executive Directors Compared to Other Employees The remuneration policy for Executive Directors is designed having regard to the remuneration policy for employees across the Group. However, there are some differences in the structure of the remuneration policy for the Executive Directors and other senior employees, which the Committee believes are necessary to reflect the different levels of responsibility. The key difference is the increased emphasis on long-term performance related pay for Executive Directors.

Consideration of Shareholder Views The Committee considers shareholder feedback received in relation to the AGM each year at its first meeting following the AGM. This feedback, as well as any additional feedback received during any other meetings with shareholders, is considered as part of the Company’s annual remuneration policy review.

The Committee notes that shareholders do not speak with a single voice, but we engage with our largest shareholders to ensure we understand the range of views which exist on remuneration issues. When any material changes are made to the remuneration policy the Committee chairman will inform major shareholders in advance, and will offer a meeting to discuss these.

In line with this policy, the Committee consulted with the Company’s major shareholders on proposed changes to the remuneration policy between August and October 2016. During these consultations the Committee was pleased to hear of the strong support for the management team and the Group’s strategy as well as the recognition of the current issue of low variable remuneration opportunity compared to peers. A variety of possible solutions were suggested including an increase to fixed remuneration, increases to existing incentive plans or the introduction of a restricted stock plan. As a result of the consultation the Committee proposes an increase to LTIP opportunity of 100 per cent of base salary, bringing remuneration opportunity more in line with peers but with additional rewards only paid for performance. By providing the management team with the opportunity to earn competitive rewards for high performance the Committee believes that the Company is better positioned to retain the existing successful management team and attract new talent as we enter the next phase of our growth strategy.

60 Imperial Brands Brands PLC| Annual | Annual Report Report and and Accounts Accounts 2016 OVERVIEW

Policy in Respect of External Board Appointments We recognise that external non-executive directorships are beneficial for both the Executive Director concerned and the Company. Each serving Executive Director is restricted to one external non-executive directorship and may not serve as the chairman of a

FTSE 100 company. At the discretion of the Board, Executive Directors are permitted to retain fees received in respect of any such STRATEGY non-executive directorship.

Alison Cooper is a Non-Executive Director of Inchcape plc and was permitted to retain the £59,167 fee received from this position in the financial year.

Policy for Non-Executive Directors Element Purpose and link to strategy Operation Maximum opportunity

Fees Attract and retain high Reviewed, but not necessarily increased, annually by the Board No prescribed PERFORMANCE performing individuals. (after recommendation by the Committee in respect of the Chairman). maximum annual Portion of fees applied increase. Fee increases, if applicable, are normally effective from 1 October. to purchase of shares Aggregate annual to align interests with The Board and, where appropriate, the Committee considers pay data at fees limited to £2.0 those of shareholders. comparator companies of similar scale. million by Articles The Senior Independent Director and the chairmen of the Audit and of Association. Remuneration Committees receive additional fees. It is proposed that from

February 2017 additional fees will also be paid for Committee memberships. GOVERNANCE

No eligibility for annual bonus, retirement benefits or to participate in the Group’s employee share plans.

Benefits Travel to the Company’s Travel to the Company’s registered office is recognised as a Grossed-up costs registered office. taxable benefit. of travel.

Non-Executive Directors’ Letters of Appointment FINANCIALS The Chairman and Non-Executive Directors do not have service agreements but the terms of their appointment, including the time commitment expected, are recorded in letters of appointment which are available for viewing at our registered office during normal business hours and both prior to and at the AGM.

In line with our annual review policy, the Chairman’s and Non-Executive Directors’ terms of appointment were reviewed and confirmed by the Board on 2 February 2016. There are no provisions regarding notice periods in their letters of appointment which state that the Chairman and Non-Executive Directors will only receive payment until the date their appointment ends and, therefore, no compensation is payable on termination. Under the terms of our Articles of Association, all Non-Executive Directors are subject to annual re-election by shareholders.

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ANNUAL REPORT ON REMUNERATION – HOW THE COMMITTEE IMPLEMENTED THE REMUNERATION POLICY FOR FINANCIAL YEAR ENDED 30 SEPTEMBER 2016 Implementing Executive Policy and Practice In implementing the Company’s remuneration policy (as detailed on pages 48 to 53 of the Company’s Annual Report and Accounts 2014 available on our website), the Committee recognises that striking the right balance in finding a fair outcome in setting a competitive level of total remuneration is a matter of judgement. In forming this judgement, the Committee considered pay data at comparator companies of similar scale, primarily looking at a market capitalisation group made up of 10 companies above and 10 companies below Imperial Brands in the FTSE, excluding Financial Services. Comparisons with other companies, however, do not determine what remuneration the Company offers but, at most, serve to define a “playing field” within which an individual’s reward needs to be positioned. In determining that positioning, the primary factors taken into account are the scale of the challenges intrinsic to that individual’s role, their ability, experience and performance.

We align the interests of long-term shareholders and employees at all levels by, wherever possible, giving our employees the annual opportunity to build a shareholding in the Company through our employee share plans, with over 30 per cent of eligible employees participating in one or more plans.

During the year the Committee exercised its discretion to ensure that remuneration appropriately reflects management performance by increasing targets within long-term incentives. Revenue targets within all in-flight LTIPs were increased to reflect the impact of the one-off uplift from the acquisition of assets in the USA thereby only rewarding organic revenue growth.

For the same reason the Committee implemented a one off increase in EPS and revenue targets for the LTIP grant made during the year to mitigate the part year uplift from the acquisition of assets in the USA.

Linking Remuneration with Strategy We focus on delivering high quality sustainable sales growth whilst effectively managing our costs and cash flows. Ensuring that our sales growth drivers and key enablers are supported and their delivery incentivised by our remuneration policy is key to maximising long-term returns to shareholders.

Alignment with Sustainable growth is at the heart of our strategy. This is supported by the inclusion of the drivers of growth our Strategy within our variable remuneration – both the annual bonus and LTIP. Stretching performance targets incentivise the delivery of sales and the creation of shareholder value.

Managing our costs and cash flows are the other elements of our strategic focus. Profitability, mainly in the form of earnings per share, forms a major part of the measurement in both the annual bonus and LTIP whilst cash conversion forms a measure for the annual bonus.

Alignment with our To align their interest with shareholders, employees at all levels are encouraged to have an interest in the Shareholders Company’s shares through both direct shareholdings (supported by shareholding requirements for senior executives) and through our share plans, with the value of the Corporate Management Group’s overall remuneration being heavily influenced by the performance of our share price.

Attracting and Retaining Our remuneration policy is designed to ensure a high quality pool of talented employees at all levels who the Right People are engaged and incentivised to deliver our strategy through clear links between reward and performance, without encouraging them to take undue risks.

We believe it is important to ensure that management is competitively rewarded in relation to peers and the other opportunities available to them whilst ensuring we neither pay more than necessary nor reward failure. Our policy is, therefore, significantly weighted towards performance based elements.

62 Imperial Brands Brands PLC| Annual | Annual Report Report and and Accounts Accounts 2016 OVERVIEW

Single Total Figure of Remuneration for each Director (Audited)

2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 Share Share Share- Share- 2016 2015 Salary Salary Taxable Taxable Annual Annual plans plans save save Pension Pension 2016 2015 £’000 and fees and fees benefits1 benefits bonus2 bonus vesting3 vesting3 vesting4 vesting benefits5 benefits Total Total STRATEGY Executive Directors Alison Cooper 1,020 965 17 16 1,469 1,544 2,441 626 – 6 590 480 5,537 3,637 Oliver Tant 649 630 17 16 934 1,008 986 – – – 169 163 2,755 1,817 Matthew Phillips 541 478 24 23 779 705 757 185 4 4 434 296 2,539 1,691 2,210 2,073 58 55 3,182 3,257 4,184 811 4 10 1,193 939 10,831 7,145 Non-Executive Directors Mark Williamson 500 450 4 4 – – – – – – – – 504 454 PERFORMANCE Ken Burnett6 26 75 10 29 – – – – – – – – 36 104 Therese Esperdy7 19 – 7 – – – – – – – – – 26 – David Haines8 100 100 2 5 – – – – – – – – 102 105 Michael Herlihy8 100 100 2 4 – – – – – – – – 102 104 Steven Stanbrook9 49 – 10 – – – – – – – – – 59 – Karen Witts 75 75 1 3 – – – – – – – – 76 78 Malcolm Wyman8 100 100 3 9 – – – – – – – – 103 109 969 900 39 54 – – – – – – – – 1,008 954 GOVERNANCE 1. Taxable benefits principally include an allowance (£15,000 in respect of Alison Cooper and Oliver Tant) in lieu of or the provision of a company car (£22,597 in respect of Matthew Phillips), fuel and health insurance. Benefits in kind for the Non-Executive Directors relate to the reimbursement of travelling expenses to meetings held at the Company’s registered office. 2. Annual bonus earned for performance over the financial year ending 30 September 2016. In line with policy half of the net value is deferred in shares for three years; no further performance conditions apply. 3. Share plans vesting represent the value of SMS and LTIP awards where the performance period ends in the year and are based on a share price of £40.1689 being the three-month average to 30 September 2016. The 2015 estimated figure has been restated to reflect actual share price at the date of vesting. 4. Gains made on exercise are calculated as the difference between the option price and the market price on the date of exercise. These sharesave options were the only options exercised in the year; 195 shares in respect of Matthew Phillips. 5. Further details are contained in the Executive Directors’ pension section on pages 65 and 66. FINANCIALS 6. Ken Burnett retired from the Board on 3 February 2016. 7. Therese Esperdy was appointed to the Board on 1 July 2016. 8. Includes payment in respect of Senior Independent Director fees of £25,000 per annum and chairmanship of Remuneration and Audit Committees at an annual rate of £25,000. 9. Steven Stanbrook was appointed to the Board on 6 February 2016.

All expense payments made to Directors were made on the basis of reimbursement of expenses incurred grossed up for tax where expenses represent a taxable benefit. No payments were made by way of taxable expenses allowances. No Directors waived their fees. No payments were made to former directors nor were any payments made for loss of office during the year.

Additional Notes to the Single Total Figure of Remuneration (Audited) This section sets out supporting information for the single total figure columns relating to annual bonus, share plans and pension benefits. In particular, it details the extent to which performance conditions have been satisfied for the annual bonus and for each share plan, namely the SMS and LTIP.

Determination of 2016 Annual Bonus Management delivered a good performance in the year to 30 September 2016, strengthening our brands and market footprint and delivering strong cash conversion. As a result, we are a stronger business and continued to deliver a 10 per cent increase in annual dividend.

The annual bonus payment, determined with reference to performance over the financial year ending 30 September 2016, is 72 per cent of maximum opportunity (2015: 80 per cent). The Committee believes this to be an appropriate reflection of the performance and progress made through the year.

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Performance against individual measures is set out below:

Maximum Actual Performance target Assessment percentage percentage of bonus of bonus Adjusted EPS growth Performance is measured based on EPS growth at constant currency. Increases in top line 35 29 KPI (constant currency) revenues together with a strong focus on cost and cash opportunities provided growth in EPS of 12.0 per cent. This delivered an 83 per cent achievement against a cut in of 7.0 per cent and a maximum target of 13.0 per cent.

Cash conversion KPI Performance is measured as cash flow as a percentage of adjusted operating profit. 25 25

Instilling a more cost conscious culture, efficiently managing our cost base and our commitment to capital discipline enabled cash conversion of 95 per cent. This delivered a 100 per cent achievement against a cut in of 80.0 per cent and a maximum target of 92.0 per cent.

Volume growth in Performance is measured based on volume growth of our Growth Brands relative to the market. 15 9 Growth Brands KPI Consistent focus on developing our Growth Brands, through investments, migrations and choices in market, has enabled us to further optimise our brand portfolio and build the strength of our key brand assets. Growth Brand volumes increased by 5.1 per cent relative to the market. This delivered a 60 per cent achievement against a cut in of parity with the external market and a maximum target of 8.5 per cent out performance.

Non-financial Non-financial measures consisted of a market share target. 15 0

We showed strong results across a broad spread of markets, with resilience in Returns markets and positive performance across Growth markets. However, the threshold target was not met.

Individual objectives Executive Directors have delivered strongly against their individual objectives, particularly in 10 9 the successful integration of the acquired USA assets.

Achievement of bonus 100 72 for 2016

KPI Key Performance Indicator used to measure the progress we make in delivering our strategy – see how we measure our performance on page 6 and 7.

No element of the annual bonus is guaranteed. Annual bonuses for Executive Directors and certain key executives are subject to malus provisions before payment and claw back during the three years following the end of the financial year in which they are earned. Claw back may be applied in the event of gross misconduct by the employee or misstatement of results where this had the effect of increasing the level of bonus that would otherwise have been paid.

Share Matching Scheme The final SMS awards, at director level, were made to Alison Cooper and Matthew Phillips in February 2014 and will vest in February 2017 based on EPS and net revenue growth performance conditions measured over the three financial years to 30 September 2016, as set out below. Under the SMS Directors could invest up to their target bonus in shares which were, subject to the achievement of the performance conditions, matched at the end of a three-year period and dividend equivalents applied to any shares vesting.

Threshold Maximum Actual Actual vesting percentage percentage Performance target performance of award of award vesting Adjusted EPS KPI 5% – 10% average annual growth 5.8% 12.5% 50% 18.5% Net revenue growth KPI, 1 3% – 7% average annual growth 1.6% 12.5% 50% 0% Achievement of SMS for 2016 18.5%

1. The target range of 3 to 7% includes the discretionary increase made by the Committee in consideration of the one off impact of the acquisition of US assets.

64 Imperial Brands Brands PLC| Annual | Annual Report Report and and Accounts Accounts 2016 OVERVIEW

Long Term Incentive Plan LTIP awards made to Alison Cooper, Oliver Tant and Matthew Phillips in November 2013 will vest in November 2016 based on performance conditions, measured over the three years, as set out below: Threshold Maximum Actual STRATEGY Actual vesting percentage percentage Performance target performance of award of award of award TSR against comparator group2 Threshold at median of peer group 90% of 12.5% 50% 50% Pro rata between median and upper quartile companies Maximum above upper quartile exceeded Adjusted EPS KPI 5% – 10% average annual growth 5.8% 6.25% 25% 9.3% Net revenue growth KPI, 1 3% – 7% average annual growth 1.6% 6.25% 25% 0% Achievement of LTIP for 2016 59.3%

1. The target range of 3 to 7% includes the discretionary increase made by the Committee in consideration of the one off impact of the acquisition of US assets. PERFORMANCE 2. The companies comprising the comparator group are:

Anheuser-Busch InBev NV Altria Group Inc Associated British Foods PLC AstraZeneca PLC British American Tobacco PLC Burberry Group PLC BT Group PLC Capita PLC Carlsberg A/S Carnival PLC Compass Group PLC Diageo PLC Experian Finance PLC GlaxoSmithkline PLC Heineken NV International Consolidated InterContinental Hotels ITV PLC Japan Tobacco Inc. Kingfisher PLC Airlines Group SA Group PLC

Marks & Spencer Group PLC Next PLC Pearson PLC Philip Morris International Inc Pernod Ricard SA GOVERNANCE Reckitt Benckiser Group PLC Reed Elsevier PLC Reynolds American Rolls-Royce PLC SAB Miller PLC J Sainsbury PLC Smith & Nephew PLC Shire PLC Tate & Lyle PLC Tesco PLC Unilever PLC Vodafone Group PLC Whitbread PLC WM Morrison Supermarkets PLC

KPI Key Performance Indicator used to measure the progress we make in delivering our strategy – see how we measure our performance on pages 6 and 7.

The TSR calculations, performed independently by Alithos Limited, use the share prices of each comparator group company, averaged over a period of three months, to determine the initial and closing prices. Dividend payments are recognised on the date shares are declared ex-dividend. The Committee considers this method gives a fairer and less volatile result as improved performance has to be sustained for FINANCIALS several weeks before it effectively impacts on the TSR calculations. PwC performs agreed upon procedures in respect of the EPS and net revenue growth performance conditions for both the SMS and LTIP performance assessments.

Sharesave Plan We believe that our Sharesave Plan is a valuable way of aligning the interests of a wide group of employees with those of our long-term shareholders. Annually we offer as many employees as practicable, together with our Executive Directors, the opportunity to join the Sharesave Plan. Options over shares are offered at a discount of up to 20 per cent of the closing mid-market price of our shares on the day prior to invitation. The Sharesave Plan allows participants to save up to £250 per month over a period of three years, and in the UK only three or, for grants in 2013 and earlier, five years, and then exercise their option over shares. In common with most plans of this type, no performance conditions are applied. In the financial year ending 30 September 2016, Matthew Phillips had a Sharesave plan vesting (2015: Alison Cooper and Matthew Phillips) and details are included in the single total figure table on page 63.

Total Pension Entitlements (Audited) The Executive Directors who served during the financial year are all members of the Imperial Tobacco Pension Fund (the Fund), which is the principal retirement benefit scheme operated by the Group in the UK.

Members who joined before 1 October 2010 are included in the defined benefit section of the Fund. For members who joined prior to 1 April 2002 the Fund is largely non-contributory with a normal retirement age of 60. New members of the Fund after 30 September 2010 accrue pension benefits in the Fund on a defined contribution basis, in the defined contribution section of the Fund.

Alison Cooper and Matthew Phillips are members of the pre-April 2002 section of the defined benefit section of the Fund. Prior to 6 April 2006 they accrued a non-contributory pension at the rate of 1/47th of their pensionable salary limited by the effect of HMRC’s earnings cap. Although HMRC removed this cap from 6 April 2006, the Fund did not dis-apply it in respect of past pensionable service and maintained its own earnings cap going forward. For pensionable service from 6 April 2006 onwards Alison Cooper and Matthew Phillips accrue an additional pension at a rate of 1/60th of their pensionable salary in excess of the Fund’s earnings cap. They pay member contributions at the rate of 5 per cent on their pensionable salary in excess of the Fund’s earnings cap. Both Alison Cooper and Matthew Phillips receive a salary supplement of 12 per cent of their pensionable salary in excess of the Fund’s earnings cap.

Oliver Tant is also in receipt of a salary supplement equal to 12 per cent of his basic salary. He is a member of the defined contribution section of the Fund. In accordance with the Rules of the Fund he opted to limit his total contributions (member and Company) to a level which would not result in him incurring an Annual Allowance charge. Consequently, any Company contributions that otherwise would have been paid to the Fund on his behalf have instead been paid to him as a salary supplement. Oliver Tant registered for Fixed Protection 2016 and opted-out of contributory membership of the defined contribution section of the Fund with effect from 1 April 2016. No pension contributions have been paid to the Fund by or in respect of him since this date. Instead the Company has paid him an additional salary supplement of 14 per cent of his salary, increasing his total salary supplement from 1 April 2016 to 26 per cent.

The salary supplements have been calculated by the independent actuaries to reflect the value of the benefits of which they are in lieu and are discounted for early payment and for employer’s national insurance contributions. The supplements are non-compensatory and non-pensionable.

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Matthew Phillips elected to use the Fund’s scheme pays facility to settle his Annual Allowance charge for the 2011/12, 2012/13 and 2013/14 tax years. His accrued pension was reduced by £11,565.78 a year (including revaluation) to offset these Annual Allowance charge payments. This reduction to pension is reflected in the accrued pension figure as at 30 September 2016 (it is also reflected in the value of the benefits as at 30 September 2016).

The following table provides the information required by Schedule 8 of the Regulations and gives details for each Executive Director of:

– the annual accrued pension payable on retirement calculated as if he/she had left service at the year-end; – the normal retirement ages; – the value of the pension benefits at the start and end of the year, as calculated in accordance with the Regulations; – the value of the pension benefits earned over the year, excluding any director’s contributions and any increases for inflation, calculated in accordance with the Regulations; and – any payments in lieu of retirement benefits. None of the Executive Directors has made additional voluntary contributions.

Executive Directors’ Pension Disclosures (Audited) Extra information to be disclosed under 2013 Directors’ Remuneration Single figure numbers Regulations

Payment in lieu of retirement Value x 20 benefits over year (net Total Value x 20 Value x 20 Pensionable (i.e. pension of director’s pension Normal at start at end Age at service at Accrued pension supplement) contributions) benefits retirement of year of year £’000 30/09/2016 30/09/2016 01/10/2015 30/9/2016 £’000 £’000 £’000 age £’000 £’000 Alison Cooper 50 17 192 219 98 492 590 60 3,840 4,380 Matthew Phillips 45 16 98 118 40 394 434 60 1,960 2,360 Oliver Tant1 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

1. Oliver Tant is a member of the defined contribution section of the Imperial Tobacco Pension Fund. He received a pension contribution into the defined contribution section of £30,000 (made up of £5,055.72 Company contribution plus £24,944.28 in respect of a salary sacrifice by Mr Tant in lieu of his personal contribution). In addition, a salary supplement of £77,868, representing 12 per cent of Mr Tant’s basic salary, was paid to him together with an additional supplement of £85,790 in lieu of Company pension contributions which were not made to the Imperial Tobacco Pension Fund in order to maintain Mr Tant’s total contributions within the Annual Allowance for pension savings). He registered for Fixed Protection 2016 and as a result opted-out of contributory membership of the Fund and ceased pension contributions with effect from 1 April 2016. Since this date Mr Tant has received an additional 14 per cent salary supplement in lieu of the Company contributions he would have received had he not registered for protection and opted out. The 14 per cent salary supplement is included in the total of £85,790.

Statement of Change in Pay of Chief Executive Compared With Other Employees Chief Executive All Employees1 to Percentage Percentage 30 September change change 2016 (2016 vs 2015) (2016 vs 2015) Salary £1,020,000 5.7 3.9 Benefits £16,635 0.9 4.5 Bonus £1,468,800 (4.9) (4.7)

1. Based on members of our Corporate Management Group. This group has been chosen as it represents a good proxy for employees across the Group but is not overly influenced by local custom, hyperinflation in some jurisdictions etc.

Relative Importance of Spend on Pay The table below shows the expenditure and percentage change in overall spend on employee remuneration and dividends.

Percentage £million unless otherwise stated 2016 2015 change Overall expenditure on pay1 826 811 1.8 Dividend paid in the year 1,386 1,259 10.1

1. Excludes employers’ social security costs.

66 Imperial Brands Brands PLC| Annual | Annual Report Report and and Accounts Accounts 2016 OVERVIEW

Share Interests and Incentives (Audited) All Executive Directors who served in the financial year currently meet the Company’s shareholding policy by either holding shares in excess of their requirement or being within five years of appointment. Current shareholdings are summarised in the following table:

Shares held Conditional awards and options held STRATEGY Unvested and Unvested and Vested but subject to subject to Vested Shareholding Current Owned subject to performance continued but not required shareholding outright holding period conditions employment exercised (% salary) (% salary)1 Requirement met2 Executive Directors Alison Cooper 162,111 18,341 329,362 354 – 3003 703 Yes In role for less Oliver Tant 829 7,958 133,927 441 – 300 54 than five years 4 Matthew Phillips 43,960 5,397 108,532 212 – 300 363 Yes PERFORMANCE Non-Executive Directors Mark Williamson 10,055 – – – – – – N/A Ken Burnett5 2,772 – – – – – – N/A Therese Esperdy – – – – – – – N/A David Haines 1,029 – – – – – – N/A Michael Herlihy 5,307 – – – – – – N/A Steven Stanbrook6 18,059 – – – – – – N/A

Karen Witts 471 – – – – – – N/A GOVERNANCE Malcolm Wyman 3,951 – – – – – – N/A

1. Based on a share price of £39.735 being the closing price on 30 September 2016. 2. Non-Executive Directors do not have a shareholding requirement but are required to invest a minimum percentage of their fees in Imperial Brands PLC shares which they are required to retain for the duration of their appointment. 3. Under the proposed policy this is to be increased to 400 per cent. 4. During the year Matthew Phillips exercised 195 shares under the international sharesave plan at an option price of £18.40. 5. Ken Burnett retired from the Board on 3 February 2016.

6. Steven Stanbrook holds his shares in the form of American Depositary Receipts. FINANCIALS There have been no changes to the above holdings since the year end.

Variable Award Grants Made During the Year (Audited) In line with our remuneration policy in force from 2014, no further awards to Executive Directors under the SMS will be made and the historic award levels have been consolidated into the Group’s LTIP.

It is intended that LTIP awards will be made in February each year in order for any change in policy to be considered by shareholders immediately prior to grant.

The resulting number of LTIP shares and the associated performance conditions are set out below.

Number of nil Amount of End of performance Threshold Weighting cost options Face value1 base salary period vesting (of award) Performance condition2, 3 Alison Cooper 100,464 £3,570,000 350% 30 September 2018 25% 50% 3 year adjusted EPS growth 25% 30% 3 year net revenue growth 25% 20% TSR relative to bespoke comparator group Oliver Tant 45,652 £1,622,250 250% 30 September 2018 25% 50% 3 year adjusted EPS growth 25% 30% 3 year net revenue growth 25% 20% TSR relative to bespoke comparator group Matthew Phillips 38,043 £1,351,875 250% 30 September 2018 25% 50% 3 year adjusted EPS growth 25% 30% 3 year net revenue growth 25% 20% TSR relative to bespoke comparator group

1. Valued using the share price at the date of grant (15 February 2016) being £35.535 per share. 2. Vesting occurs as per the vesting schedule below. 3. Key performance indicators used to measure the progress we make in delivering our strategy – see how we measure our performance on page 12.

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Performance Criterion – EPS Element This criterion is used for 50 per cent of the LTIP award. Vesting of awards on this element would occur as per the following vesting schedule.

Compound annual adjusted EPS growth1 Shares vesting (as a percentage of element) Less than 5% per annum nil 5% per annum 25% 5% to 10% per annum Between 25% and 100% (pro rata) 10% per annum or higher 100%

1. The target range of 5 to 10% reflects the exceptional uplift to our normal range of 3 to 8% in consideration of the part-year impact of the acquisition of USA assets.

Performance Criterion – Net Revenue Growth Element The net revenue growth criterion is used for 30 per cent of the LTIP award. Vesting of awards on this element would occur as per the following vesting schedule.

Compound annual growth in net revenue1 Shares vesting (as a percentage of element) Less than 3% per annum nil 3% per annum 25% 3% to 6% per annum Between 25% and 100% (pro rata) 6% per annum or higher 100%

1. The target range of 3 to 6% reflects the exceptional uplift to our normal range of 1 to 4% in consideration of the part-year impact of the acquisition of USA assets.

Performance Criterion – TSR Element The performance criterion for the TSR element is based on a single comparator group of companies across a broadly defined consumer goods sector and is applied to 20 per cent of the LTIP award.

The companies within the comparator group and the vesting schedule remain unchanged from the grant made in November 2013 detailed on page 65.

Under the rules of the LTIP, should the Company be acquired the performance period would end on the date of acquisition. Any outstanding awards would vest on a time pro rata basis subject to the achievement of the applicable performance criteria.

Awards With No Performance Conditions Made During the Year (Audited) The deferred shares awarded during the year are set out below. No Executive Directors were granted Sharesave options during the year.

Number of Portion of End of deferred shares Face value1 net bonus deferral period Alison Cooper 11,594 £405,058 50% 30 September 2018 Oliver Tant 7,569 £264,437 50% 30 September 2018 Matthew Phillips 5,292 £184,886 50% 30 September 2018

1. Valued using the share price at the date of purchase (16 December 2015) being £34.93689 per share.

68 Imperial Brands Brands PLC| Annual | Annual Report Report and and Accounts Accounts 2016 OVERVIEW

REMUNERATION DECISIONS TAKEN IN 2015/16 Salary The Committee sets base salaries having regard to individual performance, changes to the individual’s role and market data for each position based on several comparator groups which reflect the Company’s size, sector and global reach. Consideration is given to the effect any STRATEGY amendment to an individual’s base salary would have on their total remuneration package. Base salary is the only element of the package used to determine pensionable earnings.

An increase of 3 per cent, in line with other UK management, was awarded to Alison Cooper and Matthew Phillips.

An above inflation increase has been awarded to Oliver Tant to reflect both his increased responsibilities in an expanded role incorporating Group Procurement and Group Information Systems, and the competitive CFO market.

There was no increase in Non-Executive Directors’ fees, with the exception of the Chairman whose fee was brought closer to market levels through an increase from £500,000 to £525,000, however, this will not be reviewed again for a period of two years. PERFORMANCE

Percentage Salary 2015/16 Salary 2016/17 Change Alison Cooper £1,020,000 £1,051,000 3.0 Oliver Tant £649,000 £700,000 7.9 Matthew Phillips £541,000 £557,000 3.0

Annual Bonus Our shareholders and other stakeholders place significant weight on our annual performance. We, therefore, think it is appropriate to have GOVERNANCE a major element of Executive Directors’ remuneration targeted at incentivising delivery of the Group’s annual objectives and enhancing performance against key financial and non-financial targets. The maximum bonus opportunity for all Executive Directors remains unchanged at 200 per cent.

Fifty per cent of net bonus paid will be in the form of the Group’s shares deferred for a three-year period; the remaining 50 per cent will be paid in cash.

For the next financial year the performance measures have been set out in the table below: FINANCIALS Maximum Performance target of bonus Adjusted EPS growth Commercially confidential 25% Cash conversion Commercially confidential 25% Market share Share growth in core markets 20% Revenue growth in Asset Brands Commercially confidential 15% Individual objectives Commercially confidential 15%

These targets have been reweighted to reflect the Group’s revised strategic focus for the year, with an increased weighting on market share and top line growth and a slightly reduced focus on EPS.

At this point, the above performance targets are considered commercially confidential but, to the extent that any bonuses are paid, further details will be provided retrospectively in the 2017 Annual Report. The Committee is not of the view that such targets will necessarily always be confidential but will review this on a year-by-year basis.

Share Plan Awards Under the revised remuneration policy an increase in LTIP opportunity is proposed in order to ensure that the management team has the opportunity to earn comparative rewards for delivery of strong performance. This increase, equivalent to 100 per cent of salary, reduces the current gap in total remuneration opportunity between Imperial Brands and its peers.

Revised Former maximum maximum opportunity – opportunity – percentage percentage of salary of salary Alison Cooper 450 350 Oliver Tant 350 250 Matthew Phillips 350 250

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February 2017 LTIP grant Following feedback received during the consultation with shareholders the Committee has made changes to the structure of the 2017 LTIP.

These are: – an increase to the maximum target relating to EPS growth, moving from a range of 3 to 8 per cent growth to a new range of 3 to 9 per cent; and – introduction of a cash conversion measure with a weighting of 20 per cent (replacing part of the weighting on EPS). A number of our investors indicated they regard Return on Invested Capital (ROIC) as a good measure of our performance. Whilst a ROIC measure has not been introduced, the Committee pays close attention to the level of return delivered and will take ROIC into account in confirming future vesting.

Weighting Performance criteria in LTIP Adjusted EPS growth 30% Net revenue growth 30% TSR 20% Cash conversion 20%

When setting the performance criteria the Committee takes account of the Group’s long-term plans and analysts’ forecasts.

Performance Criterion – EPS Element This criterion is used for 30 per cent of the LTIP awards. Vesting of awards on this element would occur in accordance with a vesting schedule agreed by the Committee on an annual basis. The proposed vesting schedule is:

Compound annual adjusted EPS growth Shares vesting (as a percentage of element) Less than 3% per annum nil 3% per annum 25% 3% to 9% per annum Between 25% and 100% (pro rata) 9% per annum or higher 100%

Performance Criterion – Net Revenue Growth Element This criterion will be used for 30 per cent of the LTIP awards. Vesting of awards on this element would occur as per the vesting schedule below:

Compound annual net revenue growth Shares vesting (as a percentage of element) Less than 1% per annum nil 1% per annum 25% 1% to 4% per annum Between 25% and 100% (pro rata) 4% per annum or higher 100%

Performance Criterion – TSR Element The performance criterion for the TSR element will be based on a single comparator group including 40 companies across a broadly defined consumer goods sector and will be applied to 20 per cent of the LTIP.

The companies within the comparator group remain unchanged, as detailed on page 65.

Vesting of awards on this element would occur as per the vesting schedule below:

Relative TSR performance Shares vesting (as percentage of element) Below median of peer group nil At median of peer group 25% Between median and upper quartile Between 25% and 100% (pro rata) Above upper quartile 100%

Performance Criterion – Cash Conversion Element This criterion is used for 20 per cent of the LTIP awards. Vesting of awards on this element would occur in accordance with a vesting schedule agreed by the Committee on an annual basis. The proposed vesting schedule:

Average annual cash conversion Shares vesting (as a percentage of element) Less than 85% per annum nil 85% per annum 25% 85% to 92% per annum Between 25% and 100% (pro rata) 92% per annum or higher 100%

Under the rules of the LTIP, should the Company be acquired the performance period would end on the date of acquisition. Any outstanding awards would vest on a time pro rata basis subject to the achievement of the applicable performance criteria.

70 Imperial Brands Brands PLC| Annual | Annual Report Report and and Accounts Accounts 2016 OVERVIEW

Voting on the Remuneration Report at the 2016 AGM At the 2016 AGM we received a strong vote in favour of our remuneration report, with a small number of shareholders commenting on various aspects of our remuneration. We have sought to discuss these in more detail as part of the recent consultation with shareholders

and where appropriate addressed their concerns within the proposed remuneration policy. We also received a strong vote in favour of our STRATEGY remuneration policy at our 2015 AGM although a small number of shareholders expressed concern in respect of various aspects including the expectation that incentive targets should be adjusted for our USA acquisition. These were addressed by the Committee using its discretion to increase in-flight LTIP targets.

Votes cast by proxy and at the meeting in respect of the Directors’ remuneration were as follows:

Votes for including Total votes Total votes discretionary Percentage cast excluding cast including Resolution votes Percentage for Votes against against votes withheld Votes withheld votes withheld PERFORMANCE Directors’ Remuneration Report (2016 AGM) 693,449,508 94.8 38,042,663 5.2 731,492,171 14,414,282 745,906,453 Directors’ Remuneration Policy (2015 AGM) 704,892,593 93.6 48,447,661 6.4 753,340,254 9,328,030 762,668,284

Votes withheld are not included in the final figures as they are not recognised as a vote in law.

Advice Provided to the Committee New Bridge Street (NBS) is retained, having been appointed following a tendering process, by the Committee as its principal, and only material, external advisor. NBS advises on all aspects of our remuneration policy and practice and reviews our structures against corporate governance best practice. NBS also presented a review of developments in UK corporate governance, remuneration developments and GOVERNANCE reporting regulations to keep Committee members up-to-date with new developments and evolving best practice.

NBS is a founder member of the Remuneration Consultants’ Group and complies with its Code of Conduct which sets out guidelines to ensure that its advice is independent and free of undue influence. NBS’ parent companies, Aon Hewitt Limited and Aon plc, provide other human resources and insurance services respectively to the Group. Having reviewed the structures in place to ensure the independence of NBS’ advice to the Committee, it is satisfied that the other work provided by the wider Aon group does not impact on NBS’ independence.

During the year NBS was paid time based fees of £145,000.

Other companies which provided advice to the Committee are as follows: FINANCIALS

– Alithos Limited undertakes total shareholder return (TSR) calculations and provided advice on all TSR related matters. During the year it was paid a fixed fee of £19,500. Alithos Limited provided no other services to the Group; – Allen & Overy LLP is available to provide legal advice to the Committee as and when required. It was not used for remuneration-related advice during the financial year. Allen & Overy LLP also provided other legal services to the Group; – Pinsent Masons LLP provided legal advice in respect of the operation of the Group’s employee share plans; – PricewaterhouseCoopers LLP (PwC), our auditors, perform agreed upon procedures on earnings per share (EPS) and net revenue calculations used in relation to our employee share plans’ performance criteria. During the financial year PwC was paid a fixed fee of £1,850 in respect of services to the Committee; and – Towers Watson provided market pay data to ensure the consistent application of our remuneration policy for executives. During the year it was paid time based fees of £62,000 for these services. Towers Watson also provided actuarial services to the Group.

All of these advisors were appointed by the Committee which remains satisfied that the provision of those other services in no way compromises their independence. They are all paid on the basis of actual work performed rather than on a fixed fee.

The Group Human Resources Director and the Group Reward and Capability Director also attended and provided internal support and advice on market and regulatory developments in remuneration practice and on our employee share plans. Their attendance ensured the Committee was kept fully abreast of pay policies throughout the Group, which it then takes into account when determining the remuneration of the Executive Directors and our most senior executives.

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OTHER INFORMATION Our middle market share price at the close of business on 30 September 2016, being the last trading day of the financial year, was £39.735 and the range of the middle market price during the year was £33.23 to £41.54.

Full details of the Directors’ share interests are available for inspection in the Register of Directors’ Interests at our registered office.

Award Dates Our policy is to grant awards under all our employee share plans on predetermined dates based on an annual cycle.

Review of Past Performance The chart below shows the value of £100 invested in the Company on 1 October 2008 compared with the value of £100 invested in the FTSE 100 Index for each of our financial year ends to 30 September 2016. We have chosen the FTSE 100 Index as it provides the most appropriate and widely recognised index for benchmarking our corporate performance over an eight-year period.

Total Return Indices – Imperial Brands and FTSE 100

350

300

250

200

150

100 2008 2009 2010 2011 2012 2013 2014 2015 2016

Imperial Brands FTSE 100

Change in Chief Executive Remuneration 2016 2015 2014 2013 2012 2011 2010 2010 2009 Alison Cooper Alison Cooper Alison Cooper Alison Cooper Alison Cooper1 Alison Cooper1 Alison Cooper1 Gareth Davis2,3 Gareth Davis Total remuneration £’000 5,537 3,637 2,686 2,011 2,793 2,737 1,347 5,453 5,099 Annual Bonus as a percentage of maximum 72 80 69 34 51.2 33.1 84.7 84.7 85.2 Shares vesting as a percentage of maximum 45.7 15.8 5.8 nil 58.0 71.6 80.8 46.93 74.5

1. Total remuneration includes value of share plans vesting that were granted prior to appointment as Chief Executive. 2. Total remuneration includes value of share plans vesting on retirement. 3. Based on performance conditions applicable on date of retirement.

Operating Executive (excluding Executive Directors) £’000 2016 2015 Base salary 2,402 2,221 Benefits 257 189 Pension salary supplement 263 261 Bonus 2,798 2,572 LTIP annual vesting1 1,838 402 SMS annual vesting1 266 nil 7,824 5,645

1. Share plans vesting represent the value of SMS and LTIP awards where the performance period ends in the year and are based on a share price of £40.1689 being the three-month average to 30 September 2016. Note: aggregate remuneration paid to or receivable by Executive Directors, Non-Executive Directors and members of the Operating Executive for qualifying services in accordance with IAS 24, which includes National Insurance and similar charges, was £20,959,617 (2015: £14,526,087).

72 Imperial Brands Brands PLC| Annual | Annual Report Report and and Accounts Accounts 2016 OVERVIEW

KEY MANAGEMENT1 COMPENSATION FOR THE YEAR ENDED 30 SEPTEMBER 2016 (AUDITED) £’000 2016 2015

Short-term employee benefits 12,340 11,681 STRATEGY Post-employment benefits 1,313 1,182 Other long-term benefits – – Termination benefits – – Share-based payment (in accordance with IAS 24) 3,598 2,722 17,251 15,585

1. Key management includes Directors, members of the OPEX and the Company Secretary.

Employee Benefit Trusts PERFORMANCE Our policy remains to satisfy options and awards under our employee share plans from either market purchased ordinary shares or ordinary shares held in treasury, distributed through our employee benefit trusts: The Imperial Tobacco Group PLC Employee and Executive Benefit Trust (the Executive Trust) and the Imperial Tobacco Group PLC 2001 Employee Benefit Trust (the 2001 Trust) (together the Employee Benefit Trusts).

As at 30 September 2016, we held 77,289,137 ordinary shares in treasury which can be used to satisfy options and awards under our employee share plans either directly or by gifting them to the Employee Benefit Trusts.

Options and awards may also be satisfied by the issue of new ordinary shares. GOVERNANCE

Details of the ordinary shares held by the Employee Benefit Trusts are as follows:

Ordinary shares Balance at Acquired Distributed Balance at under award at Surplus/ 01/10/2015 during year during year 30/09/2016 30/09/2016 (shortfall) Executive Trust 675,463 0 (37,647) 637,816 604,485 33,331 2001 Trust 2,489,892 1,620,000 (1,258,243) 2,851,649 3,833,972 (982,323)

Share Plan Flow Rates FINANCIALS The Trust Deeds of the Employee Benefit Trusts and the rules of each of our employee share plans contain provisions limiting options and awards to 5 per cent of issued share capital in five years and 10 per cent in 10 years for all employee share plans, with an additional restriction to 5 per cent in 10 years for executive share plans. Currently, an aggregate total of 0.4 per cent of the Company’s issued share capital (including shares held in treasury) is subject to options and awards under the Group’s executive and all employee share plans.

Summary of Options and Awards Granted Cumulative options and awards granted Options and awards granted during the year as a percentage of issued share capital as a percentage of issued share capital Limit on awards (including those held in treasury) (including those held in treasury) 10% in 10 years 1.8 0.1 5% in 5 years 0.8 0.1 5% in 10 years (executive plans) 1.3 0.1

For the Board

David Haines Chairman of the Remuneration Committee

8 November 2016

www.imperialbrandsplc.comwww.imperialbrandsplc.com 73 FINANCIAL STATEMENTS AND NOTES – CONTENTS

GROUP FINANCIAL STATEMENTS PARENT COMPANY FINANCIAL STATEMENTS Independent Auditors’ Report to the Members Independent Auditors’ Report to the Members of Imperial Brands PLC 75 of Imperial Brands PLC 120 Consolidated Income Statement 80 Imperial Brands PLC Balance Sheet 122 Consolidated Statement of Comprehensive Income 81 Imperial Brands PLC Statement of changes in equity 122 Consolidated Balance Sheet 82 Notes to the Financial Statements of Imperial Brands PLC 123 Consolidated Statement of Changes in Equity 83 Related Undertakings 126 Consolidated Cash Flow Statement 84 Shareholder Information 134 NOTES TO THE FINANCIAL STATEMENTS 1 Accounting Policies 85 2 Critical Accounting Estimates and Judgements 89 3 Segment Information 90 4 Profit Before Tax 92 5 Restructuring Costs 92 6 Directors and Employees 92 7 Net Finance Costs and Reconciliation to Adjusted Net Finance Costs 93 8 Taxation 93 9 Dividends 95 10 Earnings Per Share 95 11 Intangible Assets 96 12 Property, Plant and Equipment 99 13 Joint Ventures 100 14 Inventories 101 15 Trade and Other Receivables 101 16 Cash and Cash Equivalents 101 17 Trade and Other Payables 101 18 Borrowings 102 19 Financial Risk Factors 103 20 Derivative Financial Instruments 107 21 Deferred Tax Assets and Liabilities 109 22 Retirement Benefit Schemes 110 23 Provisions 114 24 Share Capital 114 25 Share Schemes 114 26 Treasury Shares 117 27 Commitments 118 28 Legal Proceedings 118 29 Acquisitions 118 30 Net Debt 118 31 Reconciliation of Cash Flow to Movement in Net Debt 119 32 Changes in Non-Controlling Interests 119 33 Related Undertakings 119

74 Imperial Brands | Annual Report and Accounts 2016 INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF IMPERIAL BRANDS PLC OVERVIEW

REPORT ON THE GROUP FINANCIAL STATEMENTS OUR OPINION In our opinion, Imperial Brands PLC’s group financial statements (the financial statements): STRATEGY – give a true and fair view of the state of the Group’s affairs as at 30 September 2016 and of its profit and cash flows for the year then ended; – have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union; and – have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the IAS Regulation.

WHAT WE HAVE AUDITED The financial statements, included within the Annual Report and Accounts (the Annual Report), comprise:

– The Consolidated Balance Sheet as at 30 September 2016; PERFORMANCE – The Consolidated Income Statement and Consolidated Statement of Comprehensive Income for the year then ended; – The Consolidated Cash Flow Statement for the year then ended; – The Consolidated Statement of Changes in Equity for the year then ended; and – The notes to the financial statements, which include a summary of significant accounting policies and other explanatory information. Certain required disclosures have been presented elsewhere in the Annual Report, rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as audited. GOVERNANCE The financial reporting framework that has been applied in the preparation of the financial statements is IFRSs as adopted by the European Union, and applicable law.

OUR AUDIT APPROACH Context The context for our audit was set by Imperial Brands PLC’s major activities in 2016. The principal development which affected our audit was the full year impact of the prior year acquisition in the USA, as a result of which we consolidated our component team in the USA into a single location. FINANCIALS Overview

– Overall group materiality: £123 million which represents approximately 4 per cent of adjusted group profit before taxation. MATERIALITY – Following our assessment of the risk of material misstatement we selected 22 reporting entities for full scope audits which represent the principal business units. – We conducted full scope audit work at 22 of these reporting entities which included significant operations in the UK, Germany, Netherlands, Spain, USA, Australia, France and five other locations. We also conducted AUDIT SCOPE specific audit procedures in Russia. – In addition certain central reporting entities and group functions, including those covering treasury, taxation and retirement benefits, and the Parent Company were subject to a full scope audit.

AREAS OF FOCUS – Goodwill and intangible assets impairment assessment. – Accounting for restructuring provisions. – Tax accounting and the level of tax provisions held against risks.

The scope of our audit and our areas of focus We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) (ISAs (UK & Ireland)).

We designed our audit by determining materiality and assessing the risks of material misstatement in the financial statements. In particular, we looked at where the Directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits we also addressed the risk of management override of internal controls and fraud in revenue recognition, including evaluating whether there was evidence of bias by the Directors that represented a risk of material misstatement due to fraud.

The risks of material misstatement that had the greatest effect on our audit, including the allocation of our resources and effort, are identified as “areas of focus” in the table below. We have also set out how we tailored our audit to address these specific areas in order to provide an opinion on the financial statements as a whole, and any comments we make on the results of our procedures should be read in this context. This is not a complete list of all risks identified by our audit.

www.imperialbrandsplc.comwww.imperialbrandsplc.com 75 INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF IMPERIAL BRANDS PLC CONTINUED

AREA OF FOCUS HOW OUR AUDIT ADDRESSED THE AREA OF FOCUS

Goodwill and intangible assets impairment assessment We challenged the Directors’ analysis around the key drivers of the cash We focused on this area because the determination of whether flow forecasts including the ability to achieve sustained price increases, elements of goodwill and intangible assets are impaired involves market size and market share. We also evaluated the appropriateness of complex and subjective judgements by the Directors about the the key assumptions including discount rates, short-term and long-term future results of the relevant parts of the business. growth rates and performed sensitivities across the reporting segments.

At 30 September 2016 the Group had £12,098m of goodwill and For the Russian and Italian businesses we considered the impact of £594m of intangible assets with indefinite lives and reasonable investment in marketing programmes over the medium-term forecast, headroom in the majority of the Group’s groupings of cash together with the broader potential to grow profits in the longer term. We generating units (CGU’s). also considered the impact of current and expected legislative and duty changes on the business and considered the accuracy of management’s We focused on the valuation of the Growth Markets reporting current year forecasts. segment (£2,269m of goodwill and intangible assets with indefinite lives). Growth Markets is made up of a number of For the Other Premium Cigar CGU, we evaluated the reasonableness operating segments and individual CGU’s, including the Drive of the Directors’ forecast by challenging key assumptions about growth Growth CGU grouping and the Other Premium Cigar CGU strategies including supply constraints, regulatory changes in key grouping. For both of these goodwill is analysed separately markets, opportunities in new markets and changes in the relationship and management’s assessment indicated low headroom between the USA and Cuba. We also considered the accuracy of (£210m and £100m respectively). management’s current year forecasts.

For the Drive Growth CGU grouping we focused on the valuation of As a result of our work we determined that the judgement by both the Russian and Italian businesses, which represent the most management that no impairment was required in respect of Drive material parts of this CGU grouping. In particular we considered Growth and Other Premium Cigar was reasonable. We note however the robustness of short term growth included in the impairment that goodwill and intangibles held by these businesses remain sensitive models, together with discount rates and long term growth rates. to changes in key assumptions. In particular, for Drive Growth, a failure to achieve the growth objectives for planned market initiatives could For the Other Premium Cigar CGU grouping the valuation is give rise to an impairment. Given this management has disclosed dependent on continuing steady profit growth. As such we focused relevant sensitivities (see note 11). on the assumptions the Directors made about the growth rates in the context of constraints which could reasonably impact their ability to meet forecast.

Accounting for restructuring provisions The cost optimisation programme operates predominantly through The group has continued in its significant multi-year cost a series of distinct projects incorporating centralised governance and optimisation programme including factory closures, project management supporting local execution. This process gives rise to organisational rationalisation and the establishment of shared a series of specific restructuring charges being booked either at head office service centres. The group also continues to integrate its US level or in individual component businesses. We conducted audit testing businesses. Management has indicated they expect these through our group team on centrally held charges and through local programmes will require several years to complete. testing of charges at component businesses. Because the total restructuring cost also included some costs incurred at business units not included in In 2016 the charge in the Consolidated Income Statement relating our full scope audits the Group team tested these on a sample basis. to these programmes was £307m and there is a total restructuring provision held on the Consolidated Balance Sheet of £304m. Using this approach we tested the valuation, accuracy and completeness of The restructuring charge is separately identified on the face the individual restructuring costs. These primarily consisted of redundancies of the income statement and excluded from the non-GAAP and related costs, consulting and professional fees and asset impairments. earnings measure Adjusted Operating Profit. We found no material exceptions in our testing.

The recognition of restructuring costs requires judgement The principal areas of judgement underlying this work related to: to estimate the value and timing of net economic outflows – the estimation of uncertain liabilities and impairment losses, and the extent to which the Group is externally committed. The presentation in the financial statements also requires – the extent to which costs incurred on projects were sufficiently distinct consideration of whether the amounts included in the charge and incremental to warrant inclusion in the restructuring charge and, are fair and whether their separate presentation is helpful – projects which did not fit readily into the major elements of the in understanding financial performance. programme but were considered by management to be appropriate for inclusion within the overall restructuring charge.

We challenged management over the basis for their judgements in these areas and determined that the amounts included in the charge were reasonable.

We also considered the merits of separate disclosure of the restructuring charge and discussed this with management and the audit committee. We concurred with their conclusion that the extensive scale and cost of the programme, its duration over several years and the level of centralised group wide control and board focus, indicated that separate disclosure was acceptable.

76 Imperial Brands Brands PLC | Annual | Annual Report Report and and Accounts Accounts 20162016 OVERVIEW

AREA OF FOCUS HOW OUR AUDIT ADDRESSED THE AREA OF FOCUS

Tax accounting and the level of tax provisions held against risks In the calculation of deferred taxes, we assessed the adequacy of tax

There are a number of significant judgements involved in the loss recognition and the level of provision established in relation to STRATEGY determination of tax balances, specifically in relation to the a number of uncertain tax positions primarily in Europe including recognition of tax losses and the assessment of deferred taxation the challenge from the French tax authorities in relation to Altadis liabilities in relation to the distribution of reserves held in overseas Distribution France. We determined that the position adopted in the subsidiaries. The group also has a number of uncertain tax financial statements was reasonable based on our consideration of positions in relation to which management apply judgement management’s assessment of risks combined with their use of experts in setting provisions. in support of their provision for uncertain tax outcomes. We also considered the reasonability of the tax losses recognised. Given the number of judgements involved and the complexities of dealing with tax rules and regulations in numerous We considered the overall clarity of disclosure in relation to tax PERFORMANCE jurisdictions, this was an area of focus for us. provisioning and the discussion of contingent liabilities including Altadis Distribution France and a more general assessment of cross border transfer pricing and determined that they were fair and proportionate.

How we tailored the audit scope We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole,

taking into account the geographic structure of the Group, the accounting processes and controls, and the industry in which the Group operates. GOVERNANCE

The group is structured along two business lines being Tobacco and Logistics. The group financial statements are a consolidation of 278 legal entities represented by 224 reporting entities, comprising the Group’s operating businesses and centralised functions.

The group’s accounting process is structured around a local or regional finance function for each of the territories in which the Group operates. These functions maintain their own accounting records and controls and report to the head office finance team in Bristol through an integrated consolidation system. In our view, due to their significance and/or risk characteristics, 22 of the 224 reporting entities, including the Logistics sub-group, required an audit of their complete financial information and we used component auditors from other PwC network firms, and other firms operating under our instruction, who are familiar with the local laws and regulations in each of these FINANCIALS territories to perform this audit work. We also conducted specific audit procedures in Russia based on our assessment of the risk of misstatement and the scale of operations at this business unit.

Where the work was performed by component auditors, we determined the level of involvement we needed to have in the audit work at those functions to be able to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion on the Group financial statements as a whole.

The group engagement team visits the component teams on a rotational basis. In the current year the Group team visited the USA, Morocco, Germany, Sweden and Greece, as well as in-scope UK reporting locations. Video conferences were held at least once with the component auditors and management of every in-scope reporting entity and those undertaking specific procedures to discuss the results of the work performed. In addition the Group engagement team reviewed working papers of the auditors of the more significant components.

We also met the other auditors used on the logistics sub-group and reviewed their working papers during the year.

The group consolidation, financial statement disclosures and a number of complex items were audited by the Group engagement team at the head office. These included derivative financial instruments, net investment hedge accounting, treasury, taxation and retirement benefits. The Parent Company was also subject to a full scope audit.

Taken together, the reporting entities and group functions where we performed audit work accounted for approximately 82 per cent of group revenues and in excess of 90 per cent of both group profit before tax and group adjusted profit before tax.

Materiality The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and on the financial statements as a whole.

Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:

Overall group materiality £123 million (2015: £115 million).

How we determined it Approximately 4 per cent of adjusted group profit before taxation.

Rationale for benchmark applied We believe that adjusted profit before tax is the primary measure used by shareholders and other users in assessing the performance of the Group, and that by excluding items it provides a clearer view on the performance of the underlying business.

Component materiality For each component in our audit scope, we allocated a materiality that is less than our overall group materiality. The range of materiality allocated across components was for each component in our audit scope, we allocated a materiality that was less than our overall group materiality. The range of materiality allocated across components was between £10 million and £40 million for the trading entities and £80 million for the financing and treasury entity.

www.imperialbrandsplc.comwww.imperialbrandsplc.com 77 INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF IMPERIAL BRANDS PLC CONTINUED

We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £10 million (2015: £10 million) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.

Going concern Under the Listing Rules we are required to review the Directors’ Statement, set out on page 19, in relation to going concern. We have nothing to report having performed our review.

Under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to the Directors’ Statement about whether they considered it appropriate to adopt the going concern basis in preparing the financial statements. We have nothing material to add or to draw attention to.

As noted in the Directors’ Statement, the Directors have concluded that it is appropriate to adopt the going concern basis in preparing the financial statements. The going concern basis presumes that the Group has adequate resources to remain in operation, and that the Directors intend it to do so, for at least one year from the date the financial statements were signed. As part of our audit we have concluded that the Directors’ use of the going concern basis is appropriate. However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the Group’s ability to continue as a going concern.

OTHER REQUIRED REPORTING CONSISTENCY OF OTHER INFORMATION Companies Act 2006 reporting In our opinion, the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements.

ISAs (UK & Ireland) reporting Under ISAs (UK & Ireland) we are required to report to you if, in our opinion:

– information in the Annual Report is: We have no exceptions – materially inconsistent with the information in the audited financial statements; or to report. – apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course of performing our audit; or – otherwise misleading.

– the statement given by the Directors on page 33, in accordance with provision C.1.1 of the UK Corporate We have no exceptions Governance Code (the “Code”), that they consider the Annual Report taken as a whole to be fair, balanced to report. and understandable and provides the information necessary for members to assess the Group’s position and performance, business model and strategy is materially inconsistent with our knowledge of the Group acquired in the course of performing our audit.

– the section of the Annual Report on pages 39 to 43, as required by provision C.3.8 of the Code, describing We have no exceptions the work of the Audit Committee does not appropriately address matters communicated by us to the to report. Audit Committee.

THE DIRECTORS’ ASSESSMENT OF THE PROSPECTS OF THE GROUP AND OF THE PRINCIPAL RISKS THAT WOULD THREATEN THE SOLVENCY OR LIQUIDITY OF THE GROUP

Under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to:

– the Directors’ confirmation on page 32 of the Annual Report, in accordance with provision C.2.1 of the Code, that We have nothing they have carried out a robust assessment of the principal risks facing the Group, including those that would material to add or to threaten its business model, future performance, solvency or liquidity. draw attention to.

– the disclosures in the Annual Report that describe those risks and explain how they are being managed We have nothing or mitigated. material to add or to draw attention to.

– the Directors’ explanation on page 32 of the Annual Report, in accordance with provision C.2.2 of the Code, We have nothing as to how they have assessed the prospects of the Group, over what period they have done so and why they material to add or to consider that period to be appropriate, and their statement as to whether they have a reasonable expectation draw attention to. that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.

Under the Listing Rules we are required to review the Directors’ statement that they have carried out a robust assessment of the principal risks facing the Group and the Directors’ statement in relation to the longer-term viability of the Group. Our review was substantially less in scope than an audit and only consisted of making inquiries and considering the Directors’ process supporting their statements; checking that the statements are in alignment with the relevant provisions of the Code; and considering whether the statements are consistent with the knowledge acquired by us in the course of performing our audit. We have nothing to report having performed our review.

78 Imperial Brands Brands PLC | Annual | Annual Report Report and and Accounts Accounts 20162016 OVERVIEW

ADEQUACY OF INFORMATION AND EXPLANATIONS RECEIVED Under the Companies Act 2006 we are required to report to you if, in our opinion, we have not received all the information and explanations we require for our audit. We have no exceptions to report arising from this responsibility. STRATEGY

DIRECTORS’ REMUNERATION Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of Directors’ remuneration specified by law are not made. We have no exceptions to report arising from this responsibility.

CORPORATE GOVERNANCE STATEMENT Under the Listing Rules we are required to review the part of the Corporate Governance Statement relating to ten further provisions of the

Code. We have nothing to report having performed our review. PERFORMANCE

RESPONSIBILITIES FOR THE FINANCIAL STATEMENTS AND THE AUDIT OUR RESPONSIBILITIES AND THOSE OF THE DIRECTORS As explained more fully in the Statement of Directors’ Responsibilities, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view.

Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and ISAs (UK & Ireland). GOVERNANCE Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.

This report, including the opinions, has been prepared for and only for the Parent Company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

WHAT AN AUDIT OF FINANCIAL STATEMENTS INVOLVES

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance FINANCIALS that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of:

– whether the accounting policies are appropriate to the Group’s circumstances and have been consistently applied and adequately disclosed; – the reasonableness of significant accounting estimates made by the Directors; and – the overall presentation of the financial statements. We primarily focus our work in these areas by assessing the Directors’ judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements.

We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both.

In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

OTHER MATTER We have reported separately on the Parent Company financial statements of Imperial Brands PLC for the year ended 30 September 2016 and on the information in the Directors’ Remuneration Report that is described as having been audited.

John Maitland (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors

Bristol

8 November 2016

www.imperialbrandsplc.comwww.imperialbrandsplc.com 79 CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 30 SEPTEMBER

£ million unless otherwise indicated Notes 2016 2015 Revenue 3 27,634 25,289 Duty and similar items (13,535) (12,585) Other cost of sales (8,143) (7,533) Cost of sales (21,678) (20,118) Gross profit 5,956 5,171 Distribution, advertising and selling costs (2,070) (1,857) Acquisition costs – (40) Amortisation of acquired intangibles 11 (1,005) (697) Restructuring costs 5 (307) (328) Other expenses (345) (261) Administrative and other expenses (1,657) (1,326) Operating profit 3 2,229 1,988 Investment income 634 948 Finance costs (1,984) (1,209) Net finance costs 7 (1,350) (261) Share of profit of investments accounted for using the equity method 13 28 29 Profit before tax 4 907 1,756 Tax 8 (238) (33) Profit for the year 669 1,723 Attributable to: Owners of the parent 631 1,691 Non-controlling interests 38 32 Earnings per ordinary share (pence) – Basic 10 66.1 177.4 – Diluted 10 66.0 176.9

80 Imperial Brands Brands PLC | Annual | Annual Report Report and and Accounts Accounts 20162016 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME OVERVIEW FOR THE YEAR ENDED 30 SEPTEMBER

£ million Notes 2016 2015 Profit for the year 669 1,723 Other comprehensive income

Exchange movements 1,260 (198) STRATEGY Items that may be reclassified to profit and loss 1,260 (198) Net actuarial losses on retirement benefits 22 (604) (28) Deferred tax relating to net actuarial losses on retirement benefits 21 115 5 Items that will not be reclassified to profit and loss (489) (23) Other comprehensive income/(expense) for the year, net of tax 771 (221) Total comprehensive income for the year 1,440 1,502 Attributable to: PERFORMANCE Owners of the parent 1,336 1,489 Non-controlling interests 104 13 Total comprehensive income for the year 1,440 1,502

RECONCILIATION FROM OPERATING PROFIT TO ADJUSTED OPERATING PROFIT £ million Notes 2016 2015 Operating profit 2,229 1,988

Acquisition costs 29 – 40 GOVERNANCE Amortisation of acquired intangibles 11 1,005 697 Restructuring costs 5 307 328 Adjusted operating profit 3,541 3,053

RECONCILIATION FROM NET FINANCE COSTS TO ADJUSTED NET FINANCE COSTS

£ million Notes 2016 2015

Net finance costs (1,350) (261) FINANCIALS Net fair value and exchange losses/(gains) on financial instruments 7 807 (226) Post-employment benefits net financing cost 7 19 20 Adjusted net finance costs (524) (467)

www.imperialbrandsplc.comwww.imperialbrandsplc.com 81 CONSOLIDATED BALANCE SHEET AT 30 SEPTEMBER

£ million Notes 2016 2015 Non-current assets Intangible assets 11 20,704 18,690 Property, plant and equipment 12 1,959 1,768 Investments accounted for using the equity method 13 744 598 Retirement benefit assets 22 5 92 Trade and other receivables 15 89 84 Derivative financial instruments 20 1,063 901 Deferred tax assets 21 631 533 25,195 22,666 Current assets Inventories 14 3,498 2,842 Trade and other receivables 15 2,671 2,454 Current tax assets 8 45 56 Cash and cash equivalents 16 1,274 2,042 Derivative financial instruments 20 46 74 7,534 7,468 Total assets 32,729 30,134 Current liabilities Borrowings 18 (1,544) (1,957) Derivative financial instruments 20 (118) (25) Trade and other payables 17 (7,991) (6,795) Current tax liabilities 8 (284) (167) Provisions 23 (188) (197) (10,125) (9,141) Non-current liabilities Borrowings 18 (12,394) (12,250) Derivative financial instruments 20 (1,646) (735) Trade and other payables 17 (17) (13) Deferred tax liabilities 21 (1,034) (1,170) Retirement benefit liabilities 22 (1,484) (909) Provisions 23 (287) (220) (16,862) (15,297) Total liabilities (26,987) (24,438) Net assets 5,742 5,696 Equity Share capital 24 104 104 Share premium and capital redemption 5,836 5,836 Retained earnings (1,525) (315) Exchange translation reserve 896 (298) Equity attributable to owners of the parent 5,311 5,327 Non-controlling interests 32 431 369 Total equity 5,742 5,696

The financial statements on pages 80 to 119 were approved by the Board of Directors on 8 November 2016 and signed on its behalf by:

Mark Williamson Oliver Tant Chairman Director

82 Imperial Brands Brands PLC | Annual | Annual Report Report and and Accounts Accounts 20162016 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY OVERVIEW FOR THE YEAR ENDED 30 SEPTEMBER

Equity Share attributable premium Exchange to owners Non- Share and capital Retained translation of the controlling Total £ million capital redemption earnings reserve parent interests equity STRATEGY At 1 October 2015 104 5,836 (315) (298) 5,327 369 5,696 Profit for the year – – 631 – 631 38 669 Exchange movements – – – 1,194 1,194 66 1,260 Net actuarial losses on retirement benefits – – (604) – (604) – (604) Deferred tax relating to net actuarial losses on retirement benefits – – 115 – 115 – 115 Other comprehensive income – – (489) 1,194 705 66 771 Total comprehensive income – – 142 1,194 1,336 104 1,440 PERFORMANCE Transactions with owners Cash from employees on maturity/exercise of share schemes – – 9 – 9 – 9 Purchase of shares by Employee Share Ownership Trusts – – (7) – (7) – (7) Costs of employees’ services compensated by share schemes – – 26 – 26 – 26 Current tax on share-based payments – – 6 – 6 – 6

Dividends paid – – (1,386) – (1,386) (42) (1,428) GOVERNANCE At 30 September 2016 104 5,836 (1,525) 896 5,311 431 5,742

At 1 October 2014 104 5,836 (756) (119) 5,065 398 5,463 Profit for the year – – 1,691 – 1,691 32 1,723 Exchange movements – – – (179) (179) (19) (198) Net actuarial losses on retirement benefits – – (28) – (28) – (28) Deferred tax relating to net actuarial losses – – on retirement benefits 5 – 5 – 5 FINANCIALS Other comprehensive income – – (23) (179) (202) (19) (221) Total comprehensive income – – 1,668 (179) 1,489 13 1,502 Transactions with owners Cash from employees on maturity/exercise of share schemes – – 7 – 7 – 7 Costs of employees’ services compensated by share schemes – – 22 – 22 – 22 Current tax on share-based payments – – 3 – 3 – 3 Dividends paid – – (1,259) – (1,259) (42) (1,301) At 30 September 2015 104 5,836 (315) (298) 5,327 369 5,696

www.imperialbrandsplc.comwww.imperialbrandsplc.com 83 CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 30 SEPTEMBER

£ million 2016 2015 Cash flows from operating activities Operating profit 2,229 1,988 Dividends received from investments accounted for under the equity method 19 24 Depreciation, amortisation and impairment 1,244 940 Loss/(profit) on disposal of property, plant and equipment and software 6 (2) Profit on disposal of intellectual property – (31) Post-employment benefits (111) (50) Costs of employees’ services compensated by share schemes 29 25 Movement in provisions 4 (67) Operating cash flows before movement in working capital 3,420 2,827 (Increase)/decrease in inventories (149) 21 Decrease in trade and other receivables 171 218 Increase in trade and other payables 116 89 Movement in working capital 138 328 Tax paid (401) (408) Net cash generated from operating activities 3,157 2,747 Cash flows from investing activities Interest received 7 10 Purchase of property, plant and equipment (164) (194) Proceeds from sale of property, plant and equipment 42 39 Proceeds from the sale of intellectual property – 31 Purchase of intangible assets – software (51) (44) Purchase of intangible assets – intellectual property rights (14) – Internally generated intellectual property rights (2) (16) Purchase of brands and operations – (4,613) Net cash used in investing activities (182) (4,787) Cash flows from financing activities Interest paid (547) (459) Cash from employees on maturity/exercise of share schemes 9 7 Purchase of shares by Employee Share Ownership Trusts (7) – Increase in borrowings 897 4,720 Repayment of borrowings (2,637) (380) Loan to joint ventures (9) – Cash flows relating to derivative financial instruments (209) 139 Dividends paid to non-controlling interests (42) (42) Dividends paid to owners of the parent (1,386) (1,259) Net cash (used in)/generated from financing activities (3,931) 2,726 Net (decrease)/increase in cash and cash equivalents (956) 686 Cash and cash equivalents at start of year 2,042 1,413 Effect of foreign exchange rates on cash and cash equivalents 188 (57) Cash and cash equivalents at end of year 1,274 2,042

84 Imperial Brands Brands PLC | Annual | Annual Report Report and and Accounts Accounts 20162016 NOTES TO THE FINANCIAL STATEMENTS OVERVIEW

1 ACCOUNTING POLICIES ‘Investments accounted for using the equity method’. In the same BASIS OF PREPARATION way, the Group’s share of earnings is presented in the consolidated income statement below operating profit entitled ‘Share of profit of

The consolidated financial statements have been prepared in investments accounted for using the equity method’. STRATEGY accordance with International Financial Reporting Standards (IFRS) and interpretations issued by the IFRS Interpretations Committee FOREIGN CURRENCY (IFRSIC) as published by the International Accounting Standards Board and adopted by the EU. In addition, the financial statements Items included in the financial statements of each Group comply with those parts of the Companies Act 2006 applicable to company are measured using the currency of the primary companies reporting under IFRS. economic environment in which the company operates (the functional currency). The financial statements have been prepared under the historical cost convention except where fair value measurement is required The income and cash flow statements of Group companies using PERFORMANCE under IFRS as described below in the accounting policies on non-sterling functional currencies are translated to sterling (the financial instruments. Group’s presentational currency) at average rates of exchange in each period. Assets and liabilities of these companies are The preparation of the consolidated financial statements requires translated at rates of exchange ruling at the balance sheet date. management to make estimates and assumptions that affect the The differences between retained profits and losses translated at reported amounts of revenues and expenses during the period and average and closing rates are taken to reserves, as are differences of assets, liabilities and contingent liabilities at the balance sheet arising on the retranslation of the net assets at the beginning of date. The key estimates and assumptions are set out in note 2 the year. Critical Accounting Estimates and Judgements. Such estimates and GOVERNANCE assumptions are based on historical experience and various other Transactions in currencies other than a company’s functional factors that are believed to be reasonable in the circumstances and currency are initially recorded at the exchange rate ruling at the constitute management’s best judgement at the date of the financial date of the transaction. Foreign exchange gains and losses resulting statements. In the future, actual experience may deviate from these from the settlement of such transactions and from the translation at estimates and assumptions. This could affect future financial exchange rates ruling at the balance sheet date of monetary assets statements as the original estimates and assumptions are modified, and liabilities denominated in foreign currencies are recognised as appropriate, in the year in which the circumstances change. in the consolidated income statement with exchange differences arising on trading transactions being reported in operating profit, FINANCIALS A summary of the more important accounting policies is set and those arising on financing transactions being reported in net out below. finance costs unless as a result of net investment hedging they are reported in other comprehensive income. BASIS OF CONSOLIDATION The Group designates as net investment hedges certain external The consolidated financial statements comprise the results of borrowings and derivatives up to the value of the net assets of Imperial Brands PLC (the Company) and its subsidiary undertakings, Group companies that use non-sterling functional currencies together with the Group’s share of the results of its associates and after deducting permanent intragroup loans. Gains or losses on joint arrangements. these hedges that are regarded as highly effective are transferred Subsidiaries are those entities controlled by the Group. Control to other comprehensive income, where they offset gains or losses exists when the Group is exposed to, or has the rights to, variable on translation of the net investments that are recorded in equity, returns from its involvement with the entity and has the ability to in the exchange translation reserve. affect those returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial REVENUE RECOGNITION statements from the date that control commences until the date For the Tobacco business, revenue comprises the invoiced value that control ceases. Where necessary, accounting policies of for the sale of goods and services net of sales taxes, rebates and subsidiaries are changed to ensure consistency with the policies discounts. Revenue from the sale of goods is recognised when adopted by the Group. a Group company has delivered products to the customer, the customer has accepted the products and collectability of the related The acquisition method of accounting is used to account for the receivables is reasonably assured. Sales of services, which include purchase of subsidiaries. The excess of the value transferred to the fees for distributing certain third party products, are recognised in seller in return for control of the acquired business together with the the accounting period in which the services are rendered. fair value of any previously held equity interest in that business over the Group’s share of the fair value of the identifiable net assets is For the Logistics business, revenue comprises the invoiced value recorded as goodwill. for the sale of goods and services net of sales taxes, rebates and discounts when goods have been delivered or services provided. Intragroup transactions, balances and unrealised gains on The Logistics business only recognises commission revenue on transactions between Group companies are eliminated. Unrealised purchase and sale transactions in which it acts as a commission losses are also eliminated unless costs cannot be recovered. agent. Distribution and marketing commissions are included in revenue. Revenue is recognised on products on consignment when JOINT VENTURES these are sold by the consignee. The Group applies IFRS 11 to all joint arrangements. Under IFRS 11 investments in joint arrangements are classified as either joint Customer rebates and discounts may be offered to promote sales. operations or joint ventures depending on the contractual rights The calculated costs are accrued and accounted for as incurred and obligations of each investor. The Group has assessed the nature and matched as a deduction from the associated revenues (i.e. of its joint arrangements and determined them to be joint ventures. excluded from revenues reported in the Group’s consolidated The financial statements of joint ventures are included in the Group income statement). financial statements using the equity accounting method, with the Group’s share of net assets included as a single line item entitled

www.imperialbrandsplc.comwww.imperialbrandsplc.com 85 NOTES TO THE FINANCIAL STATEMENTS CONTINUED

1 ACCOUNTING POLICIES CONTINUED fair value (depending on how they are acquired) less accumulated DUTY AND SIMILAR ITEMS amortisation and impairment. Duty and similar items includes duty and levies having the These assets consist mainly of acquired trademarks, intellectual characteristics of duty. In countries where duty is a production tax, property, concessions and rights, acquired customer relationships duty is included in revenue and in cost of sales in the consolidated and computer software. The Davidoff cigarette trademark and some income statement. Where duty is a sales tax, duty is excluded from premium cigar trademarks are considered by the Directors to have revenue and cost of sales. Payments due in the USA under the indefinite lives based on the fact that they are established international Master Settlement Agreement are considered to be levies having brands with global potential. Trademarks with indefinite lives are not the characteristics of duty and are treated as a production tax. amortised but are reviewed annually for impairment. Intellectual property (including trademarks), supply agreements TAXES (including customer relationships) and computer software are Current tax is the expected tax payable on the taxable income for amortised over their estimated useful lives as follows: the year, using tax rates enacted or substantively enacted at the Intellectual property 5 – 30 years straight line balance sheet date, and any adjustments to tax payable in respect Supply agreements 3 – 15 years straight line of previous years. Software 3 – 10 years straight line Management periodically evaluates positions taken in tax returns where the applicable tax regulation is subject to interpretation and PROPERTY, PLANT AND EQUIPMENT establishes provisions on the basis of amounts expected to be paid Property, plant and equipment are shown in the consolidated to the tax authorities only where it is considered more likely than balance sheet at historical cost or fair value (depending on how they not that an amount will be paid or received. This test is applied to are acquired), less accumulated depreciation and impairment. Costs each individual uncertain position which is then measured on the incurred after initial recognition are included in the assets’ carrying single most likely outcome based on interpretation of legislation, amounts or recognised as a separate asset as appropriate only when management experience and professional advice. it is probable that future economic benefits associated with them will Deferred tax is provided in full on temporary differences between flow to the Group and the cost of the item can be measured reliably. the carrying amount of assets and liabilities in the financial Land is not depreciated. Depreciation is provided on other property, statements and the tax base, except if it arises from initial plant and equipment so as to write down the initial cost of each recognition of an asset or liability in a transaction, other than a asset to its residual value over its estimated useful life as follows: business combination, that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax is Property up to 50 years straight line provided on temporary differences arising on investments Plant and equipment 2 – 20 years straight line/reducing balance in subsidiaries, except where the timing of the reversal of the Fixtures and motor temporary difference is controlled by the Group and it is probable vehicles 2 – 15 years straight line that the temporary difference will not reverse in the foreseeable future. Deferred tax assets are recognised only to the extent that The assets’ residual values and useful lives are reviewed and, if it is probable that future taxable profits will be available against appropriate, adjusted at each balance sheet date. which the assets can be realised. Deferred tax is determined using the tax rates that have been enacted or substantively enacted at the FINANCIAL INSTRUMENTS AND HEDGING balance sheet date, and are expected to apply when the deferred tax Financial assets and financial liabilities are recognised when the liability is settled or the deferred tax asset is realised. Group becomes a party to the contractual provisions of the relevant instrument. Financial assets are de-recognised when the rights to DIVIDENDS receive benefits have expired or been transferred, and the Group Final dividends are recognised as a liability in the period in which the has transferred substantially all risks and rewards of ownership. dividends are approved by shareholders, whereas interim dividends Financial liabilities are de-recognised when the obligation is are recognised in the period in which the dividends are paid. extinguished. Non-derivative financial assets are classified as loans and INTANGIBLE ASSETS – GOODWILL receivables. Receivables are initially recognised at fair value Goodwill represents the excess of value transferred to the seller and are subsequently stated at amortised cost using the effective in return for control of the acquired business together with the fair interest method, subject to reduction for allowances for estimated value of any previously held equity interest in that business over irrecoverable amounts. A provision for impairment of receivables is the Group’s share of the fair value of the identifiable net assets. established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of Goodwill is tested at least annually for impairment and carried those receivables. The amount of the provision is the difference at cost less accumulated impairment losses. Any impairment is between the asset’s carrying amount and the present value of recognised immediately in the consolidated income statement and estimated future cash flows, and is recognised in the consolidated cannot be subsequently reversed. For the purpose of impairment income statement. For interest-bearing assets, the carrying value testing, goodwill is allocated to groups of cash-generating units that includes accrued interest receivable. are expected to benefit from the business combination in which the goodwill arose. Non-derivative financial liabilities are initially recognised at fair value and are subsequently stated at amortised cost using the INTANGIBLE ASSETS – OTHER effective interest method. For borrowings, the carrying value includes accrued interest payable, as well as unamortised Other intangible assets are initially recognised in the consolidated transaction costs. balance sheet at historical cost unless they are acquired as part of a business combination, in which case they are initially recognised at Cash and cash equivalents include cash in hand and deposits held fair value. They are shown in the balance sheet at historical cost or on call, together with other short-term highly liquid investments.

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The Group transacts derivative financial instruments to manage the The service cost of providing retirement benefits to employees underlying exposure to foreign exchange and interest rate risks. The during the year is charged to operating profit. Past service costs are Group does not transact derivative financial instruments for trading recognised immediately in operating profit, unless the changes to purposes. Derivative financial instruments are initially recorded at the pension plan are conditional on the employees remaining in STRATEGY fair value plus any directly attributable transaction costs. Derivative service for a specified period of time. financial assets and liabilities are included in the consolidated All actuarial gains and losses, including differences between actual balance sheet at fair value, and include accrued interest receivable and expected returns on assets and differences that arise as a result and payable where relevant. However, as the Group has decided (as of changes in actuarial assumptions, are recognised immediately permitted under IAS 39) not to cash flow or fair value hedge account in full in the statement of comprehensive income for the period in for its derivative financial instruments, changes in fair values are which they arise. An interest charge is made in the income statement recognised in the consolidated income statement in the period by applying the rate used to discount the defined benefit obligations in which they arise unless the derivative qualifies and has been to the net defined benefit liability of the schemes. PERFORMANCE designated as a net investment hedging instrument in which case the changes in fair values, attributable to foreign exchange, For defined contribution schemes, contributions are recognised as are recognised in other comprehensive income. an employee benefit expense when they are due. Collateral transferred under the terms and conditions of credit support annex documents under International Swaps and SHARE-BASED PAYMENTS Derivatives Association (ISDA) agreements in respect of certain The Group applies the requirements of IFRS 2 Share-Based Payment derivatives are net-settled and are therefore netted off the carrying Transactions to both equity-settled and cash-settled share-based

value of those derivatives in the consolidated balance sheet. employee compensation schemes. The majority of the Group’s GOVERNANCE schemes are equity-settled. INVENTORIES Equity-settled share-based payments are measured at fair value Inventories are stated at the lower of cost and net realisable value. at the date of grant and are expensed over the vesting period, based Cost is determined using the first in first out (FIFO) method. The on the number of instruments that are expected to vest. For plans cost of finished goods and work in progress comprises raw materials, where vesting conditions are based on total shareholder returns, direct labour, other direct costs and related production overheads the fair value at the date of grant reflects these conditions. Earnings (based on normal operating capacity). Net realisable value is the per share and net revenue vesting conditions are reflected in the estimated selling price in the ordinary course of business, less estimate of awards that will eventually vest. For cash-settled share- FINANCIALS the estimated costs of completion and selling expenses. based payments, a liability equal to the portion of the services received is recognised at its current fair value at each balance sheet Leaf tobacco inventory which has an operating cycle that exceeds date. Where applicable the Group recognises the impact of revisions 12 months is classified as a current asset, consistent with to original estimates in the consolidated income statement, with recognised industry practice. a corresponding adjustment to equity for equity-settled schemes and current liabilities for cash-settled schemes. Fair values are PROVISIONS measured using appropriate valuation models, taking into account A provision is recognised in the consolidated balance sheet when the terms and conditions of the awards. the Group has a legal or constructive obligation as a result of a past The Group funds the purchase of shares to satisfy rights to shares event, it is more likely than not that an outflow of resources will be arising under share-based employee compensation schemes. required to settle that obligation, and a reliable estimate of the Shares acquired to satisfy those rights are held in Employee Share amount can be made. Ownership Trusts. On consolidation, these shares are accounted A provision for restructuring is recognised when the Group has for as a deduction from equity attributable to owners of the parent. approved a detailed formal restructuring plan, and the restructuring When the rights are exercised, equity is increased by the amount has either commenced or has been publicly announced, and it is of any proceeds received by the Employee Share Ownership Trusts. more likely than not that the plan will be implemented, and the amount required to settle any obligations arising can be reliably TREASURY SHARES estimated. Future operating losses are not provided for. When the Company purchases its own equity share capital Where there are a number of similar obligations, the likelihood (treasury shares), the consideration paid, including any directly that an outflow will be required in settlement is determined by attributable incremental costs (net of income taxes), is deducted considering the class of obligations as a whole. A provision is on consolidation from equity attributable to owners of the parent recognised even if the likelihood of an outflow with respect to any until the shares are reissued or disposed of. When such shares are one item included in the same class of obligations may be small. subsequently sold or reissued, any consideration received, net of any directly attributable incremental transaction costs and the RETIREMENT BENEFIT SCHEMES related income tax effects, increases equity attributable to owners of the parent. When such shares are cancelled they are transferred For defined benefit schemes, the amount recognised in the to the capital redemption reserve. consolidated balance sheet is the difference between the present value of the defined benefit obligation at the balance sheet date and the fair value of the scheme assets to the extent that they are demonstrably recoverable either by refund or a reduction in future contributions. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash flows using interest rates of high quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension obligation.

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1 ACCOUNTING POLICIES CONTINUED Group’s foreign operations, as permitted by IAS 39, in order to USE OF ADJUSTED MEASURES minimise income statement volatility. Management believes that non-GAAP or adjusted measures provide We exclude fair value gains and losses on derivative financial a useful comparison of business performance and reflect the way instruments and exchange gains and losses on borrowings from in which the business is controlled. Accordingly, adjusted measures adjusted net finance costs. Fair value gains and losses on the of operating profit, net finance costs, profit before tax, tax, attributable interest element of derivative financial instruments are excluded earnings and earnings per share exclude, where applicable, acquisition as they will reverse over time or are matched in future periods costs, amortisation and impairment of acquired intangibles, by interest charges. Fair value gains and losses on the currency restructuring costs, post-employment benefits net financing cost, element of derivative financial instruments and exchange gains fair value and exchange gains and losses on financial instruments, and losses on borrowings are excluded as the relevant foreign and related tax effects and significant one-off tax provision charges exchange gains and losses on the commercially hedged item are or credits arising from the resolution of prior year tax matters. accumulated as a separate component of other comprehensive Reconciliations between adjusted and reported operating profit income in accordance with the Group’s policy on foreign currency. are included within note 3 to the financial statements, adjusted Restructuring Costs and reported net finance costs in note 7, adjusted and reported tax Significant one-off costs incurred in integrating acquired in note 8, and adjusted and reported earnings per share in note 10. businesses and in major rationalisation and optimisation initiatives The adjusted measures in this report are not defined terms under together with their related tax effects are excluded from our adjusted IFRS and may not be comparable with similarly titled measures earnings measures. These costs include the impairment of property, reported by other companies. plant and equipment which are surplus to requirements due to restructuring activity. The items excluded from adjusted results are those which are one-off in nature or which arose due to acquisitions and are not Post-Employment Benefits Net Financing Cost influenced by the day to day operations of the Group, and the The net interest on defined benefit assets or liabilities, together with movements in the fair value of financial instruments which are the unwind of discount on redundancy, social plans and other long marked to market and not naturally offset. Adjusted net finance term provisions are reported within net finance costs. These items costs also excludes all post-employment benefit net finance cost together with their related tax effects are excluded from our since pension assets and liabilities and redundancy and social adjusted earnings measures. plan provisions do not form part of adjusted net debt. This allows Tax Matters comparison of the Group’s cost of debt with adjusted net debt. The Significant one-off tax charges or credits arising from the resolution adjusted measures are used by management to assess the Group’s of prior year tax matters (outside of changes in estimates in the normal financial performance and aid comparability of results year on year. course of business) are excluded from our adjusted tax charge to aid The principal adjustments made to reported profits are as follows: comparability and understanding of the Group’s performance. The recognition and utilisation of deferred tax assets relating to losses Acquisition Costs not historically generated as a result of the underlying business Adjusted measures exclude costs associated with major performance are excluded on the same basis. acquisitions as they do not relate to the day to day operational performance of the Group. OTHER NON-GAAP MEASURES USED BY Amortisation and Impairment of Acquired Intangibles MANAGEMENT Acquired intangibles are amortised over their estimated useful Net Revenue economic lives where these are considered to be finite. Acquired Tobacco net revenue comprises tobacco and Fontem Ventures intangibles considered to have an indefinite life are not amortised. revenue less duty and similar items, excluding peripheral products. We exclude from our adjusted measures the amortisation and Management considers this an important measure in assessing the impairment of acquired intangibles, other than software, and the performance of Tobacco operations. deferred tax associated with amortisation of acquired intangibles and tax deductible goodwill. The deferred tax is excluded on the Distribution Fees basis that it will only crystallise upon disposal of the intangibles Distribution fees comprises the Logistics segment revenue less and goodwill. The related current cash tax benefit is retained in the the cost of distributed products. Management considers this adjusted measure to reflect the ongoing tax benefit to the Group. an important measure in assessing the performance of Logistics operations. Fair Value Gains and Losses on Derivative Financial Instruments and Exchange Gains and Losses on Borrowings Adjusted Net Debt IAS 39 requires that all derivative financial instruments are Management monitors the Group’s borrowing levels using adjusted recognised in the consolidated balance sheet at fair value, with net debt which excludes interest accruals and the fair value of changes in the fair value being recognised in the consolidated derivative financial instruments providing commercial cash income statement unless the instrument satisfies the hedge flow hedges. accounting rules under IFRS and the Group chooses to designate the derivative financial instrument as a hedge. NEW ACCOUNTING STANDARDS AND INTERPRETATIONS The Group hedges underlying exposures in an efficient, commercial and structured manner. However, the strict hedging requirements of There have been no new standards which became effective for the IAS 39 may lead to some commercially effective hedge positions not current reporting period, that have had a material effect on the Group. qualifying for hedge accounting. As a result, and as permitted under Certain changes to IFRS will be applicable to the consolidated IAS 39, the Group has decided not to apply cash flow or fair value financial statements in future years. IFRS 15 Revenue from Contracts hedge accounting for its derivative financial instruments. However, with Customers which is effective for the Group for its 2019 financial the Group does apply net investment hedging, designating certain statements will result in some items currently classified as costs borrowings and derivatives as hedges of the net investment in the being netted against revenue. It is not expected to have material

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effect on the Group’s net asset or results. Management has yet to which the assets will generate revenue, and are periodically fully assess the impact of IFRS 9 Financial Instruments which is reviewed for continued appropriateness. Changes to the estimates also effective for the Group for its 2019 financial statements. Our used can result in significant variations in the carrying value. initial assessment of IFRS 16 Leases, effective for the Group for its STRATEGY The Group assesses the impairment of intangible assets and 2020 financial statements, is that it will not have a material effect property, plant and equipment subject to amortisation or on the Group’s net assets or results. There are no other standards depreciation whenever events or changes in circumstances or interpretations that are expected to have a material effect on indicate that the carrying value may not be recoverable. the Group’s net assets or results. Additionally, goodwill arising on acquisitions and indefinite lived assets are subject to impairment review. The Group’s management 2 CRITICAL ACCOUNTING ESTIMATES AND undertakes an impairment review annually or more frequently if JUDGEMENTS events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important that PERFORMANCE The Group makes estimates and assumptions regarding the could trigger an impairment review of intangible assets and/or future. Estimates and judgements are continually evaluated property, plant and equipment include the following: based on historical experience, and other factors, including expectations of future events that are believed to be reasonable – significant underperformance relative to historical or projected under the circumstances. future operating results; In the future, actual experience may deviate from these estimates – significant changes in the manner of the use of the acquired and assumptions. The estimates and assumptions that have a assets or the strategy for the overall business; and

significant risk of causing a material adjustment to the carrying – significant negative industry or economic trends. GOVERNANCE amounts of assets and liabilities within the current financial year The complexity of the estimation process and issues related to are discussed below. the assumptions, risks and uncertainties inherent in the application of the Group’s accounting estimates in relation to intangible assets LEGAL PROCEEDINGS AND DISPUTES and property, plant and equipment affect the amounts reported in The Group reviews outstanding legal cases following developments the financial statements, especially the estimates of the expected in the legal proceedings at each balance sheet date, considering the useful economic lives and the carrying values of those assets. If nature of the litigation, claim or assessment; the legal processes and business conditions were different, or if different assumptions potential level of damages in the jurisdiction in which the litigation, were used in the application of this and other accounting estimates, FINANCIALS claim or assessment has been brought; the progress of the case it is likely that materially different amounts could be reported in the (including progress after the date of the financial statements but Group’s financial statements. Current and future levels of volatility before those statements are issued); the opinions or views of legal and uncertainty over economic conditions are important factors in counsel and other advisers; experience of similar cases; and any assessing the reasonableness of these estimates, assumptions and decision of the Group’s management as to how it will respond to judgements. Further information on intangibles assets is given in the litigation, claim or assessment. note 11.

To the extent that the Group’s assessments at any time do not INCOME TAXES reflect subsequent developments or the eventual outcome of any claim, its future financial statements may be materially affected, The Group is subject to income tax in numerous jurisdictions and with a favourable or adverse impact upon the Group’s operating significant judgement is required in determining the provision profit, financial position and liquidity. for tax. There are many transactions and calculations for which the ultimate tax determination is uncertain. The Group recognises A summary of significant legal cases in which the Group is provisions for tax based on estimates of the taxes that are likely currently involved is disclosed in note 28. to become due. Where the final tax outcome is different from the amounts that were initially recorded, such differences will impact INTANGIBLE ASSETS AND PROPERTY, PLANT the current income tax and deferred tax provisions in the period in AND EQUIPMENT which such determination is made. Further information on income The Group allocates the purchase price of acquired businesses taxes is given in notes 8 and 21 to these financial statements. to their identifiable tangible and intangible assets. For major acquisitions we engage external consultants to assist in the PROVISIONS valuation of identifiable intangible assets. The valuation process The Group holds provisions where appropriate in respect of is based on discounted forecast cash flows and is dependent estimated future economic outflows, principally for restructuring on assumptions about cash flows, economic factors and activity, which arise due to past events. Estimates are based on business strategy. management judgement and information available at the balance On acquisition intangible assets and property, plant and equipment sheet date. Actual outflows may not occur as anticipated, and are valued at fair value – intangible assets using the income method estimates may prove to be incorrect, leading to further charges or and property, plant and equipment using assessments of releases of provisions as circumstances dictate. Further information independent valuers. Goodwill represents the excess of value on provisions is given in notes 5 and 23. transferred to the seller in return for control of the acquired business together with the fair value of any previously held equity interest in that business over the Group’s share of the fair value of the identifiable net assets.

Intangible assets (other than goodwill, the Davidoff cigarette trademark and certain premium cigar trademarks) and property, plant and equipment are amortised or depreciated over their useful lives which are based on management’s estimates of the period over

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3 SEGMENT INFORMATION The function of Chief Operating Decision Maker (defined in IFRS 8), which is to review performance and allocate resources, is performed Imperial Brands comprises two distinct businesses – Tobacco by the Board and the Chief Executive, who are regularly provided and Logistics. The Tobacco business comprises the manufacture, with information on our segments. This information is used as the marketing and sale of tobacco and tobacco-related products, basis of the segment revenue and profit disclosures provided below. including sales to (but not by) the Logistics business. The Logistics The main profit measure used by the Board and the Chief Executive business comprises the distribution of tobacco products for tobacco is adjusted operating profit. Segment balance sheet information product manufacturers, including Imperial Brands, as well as a wide is not provided to the Board or the Chief Executive. Our reportable range of non-tobacco products and services. The Logistics business segments are Growth Markets (which includes Premium Cigar and is run on an operationally neutral basis ensuring all customers are Fontem Ventures), USA, Returns Markets North, Returns Markets treated equally, and consequently transactions between the Tobacco South and Logistics. Prevailing market characteristics such as and Logistics businesses are undertaken on an arm’s length basis maturity, excise structure and the breadth of the distribution reflecting market prices for comparable goods and services. networks determine the allocation of Returns Markets between The Tobacco business is managed based on the strategic role Returns Markets North and Returns Markets South. of groups of markets rather than their geographic proximity, Operating segments are considered to be business markets. The with divisions focused on prioritising growth or returns. Returns main tobacco business markets within the Growth, Returns Markets Markets are typically mature markets where we have relatively North and Returns Markets South reportable segments are: large market shares and our objective is to maximise returns over the long-term by growing profits while actively managing market Growth Markets – Iraq, Norway, Russia, Saudi Arabia, Taiwan (also share. Growth Markets are mainly large profit or volume pools includes Premium Cigar and Fontem Ventures); where we typically have market shares below 15 per cent and Returns Markets North – Australia, Belgium, Germany, Netherlands, where our total tobacco approach provides many opportunities Poland, United Kingdom; and for share and profit growth both now and in the future. Following the 2015 acquisition, the USA has become a significant market Returns Markets South – France, Spain and our African markets and is therefore disclosed separately. including Algeria, Ivory Coast, Morocco.

TOBACCO £ million unless otherwise indicated 2016 2015 Revenue 20,890 19,011 Net revenue 7,167 6,251 Operating profit 2,126 1,910 Adjusted operating profit 3,360 2,895 Adjusted operating margin % 46.9 46.3

LOGISTICS £ million unless otherwise indicated 2016 2015 Revenue 7,505 7,025 Distribution fees 809 749 Operating profit 98 74 Adjusted operating profit 176 154 Adjusted distribution margin % 21.8 20.6

REVENUE 2016 2015 Total External Total External £ million revenue revenue revenue revenue Tobacco Growth Markets 3,137 3,085 3,019 2,970 USA 2,942 2,942 1,415 1,415 Returns Markets North 12,537 12,504 12,332 12,303 Returns Markets South 2,274 1,598 2,245 1,576 Total Tobacco 20,890 20,129 19,011 18,264 Logistics 7,505 7,505 7,025 7,025 Eliminations (761) – (747) – Total Group 27,634 27,634 25,289 25,289

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TOBACCO NET REVENUE

£ million 2016 2015 Growth Markets 1,568 1,449 STRATEGY USA 1,477 707 Returns Markets North 2,645 2,649 Returns Markets South 1,477 1,446 Total Tobacco 7,167 6,251

Tobacco net revenue excludes revenue from the sale of peripheral products of £190 million (2015: £175 million).

ADJUSTED OPERATING PROFIT AND RECONCILIATION TO PROFIT BEFORE TAX PERFORMANCE £ million 2016 2015 Tobacco Growth Markets 443 409 USA 823 375 Returns Markets North 1,439 1,475 Returns Markets South 655 636 Total Tobacco 3,360 2,895

Logistics 176 154 GOVERNANCE Eliminations 5 4 Adjusted operating profit 3,541 3,053 Acquisition costs – Tobacco – (40) Amortisation of acquired intangibles – Tobacco (927) (617) Amortisation of acquired intangibles – Logistics (78) (80) Restructuring costs – Tobacco (307) (328) Operating profit 2,229 1,988

Net finance costs (1,350) (261) FINANCIALS Share of profit of investments accounted for using the equity method 28 29 Profit before tax 907 1,756

OTHER INFORMATION 2016 2015 Additions Additions to property, Depreciation to property, Depreciation plant and and software plant and and software £ million equipment amortisation equipment amortisation Tobacco Growth Markets 32 33 32 31 USA 42 31 20 13 Returns Markets North 53 65 93 61 Returns Markets South 24 37 35 31 Total Tobacco 151 166 180 136 Logistics 13 31 14 29 Total Group 164 197 194 165

Additions to property, plant and equipment exclude those obtained as part of acquisitions (see note 12).

ADDITIONAL GEOGRAPHIC ANALYSIS External revenue and non-current assets are presented for the UK and for individually significant countries. The Group’s products are sold in over 160 countries.

2016 2015 External Non-current External Non-current £ million revenue assets revenue assets UK 4,356 98 4,498 119 Germany 3,559 3,405 3,408 3,123 France 3,461 2,844 3,300 2,597 USA 3,065 8,057 1,536 7,308 Other 13,193 9,003 12,547 7,909 Total Group 27,634 23,407 25,289 21,056

Non-current assets comprise intangible assets, property, plant and equipment, and investments accounted for using the equity method.

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4 PROFIT BEFORE TAX Profit before tax is stated after charging/(crediting):

£ million 2016 2015 Raw materials and consumables used 1 899 868 Changes in inventories of finished goods – Tobacco 1 1,765 1,802 Changes in inventories of finished goods – Logistics 1 4,587 4,381 Operating lease charges 56 52 Net foreign exchange losses/(gains) 467 (122) Write down of inventories 49 29 Loss/(profit) on disposal of property, plant and equipment and software 6 (2) Impairment of trade receivables 5 3

1. 2015 restated to separately disclose the change in inventories of finished goods between the Tobacco and Logistics business.

ANALYSIS OF FEES PAYABLE TO PRICEWATERHOUSECOOPERS LLP AND ITS ASSOCIATES £ million 2016 2015 Audit of Parent Company and consolidated financial statements 0.9 0.9 Audit of the Company’s subsidiaries 3.4 3.6 Audit related assurance services – 0.2 4.3 4.7 Tax advisory services 1.1 1.0 Tax compliance services 0.3 0.1 Other services 0.3 3.0 6.0 8.8

5 RESTRUCTURING COSTS £ million 2016 2015 Employment related 144 100 Asset impairments 51 113 Other charges 112 115 307 328

The charge for the year ending 30 September 2016 was £307 million (2015: £328 million) and relates mainly to our cost optimisation programme announced in 2013 (£188 million); this includes the closure of the Logrono (£108 million) and Mullingar (£21 million) factories, which were communicated earlier in the year. An additional £49 million was charged for integration costs relating to the assets acquired from Lorillard in 2015. The balance of £70 million covers all other restructuring activities across the Group.

The cost optimisation programme is expected to have a cash implementation cost in the region of £600 million and generate savings of £300 million by 2018. In 2016 the cash cost of the programme was £80 million (2015: £169 million), bringing the cumulative net cash cost of the programme to £420 million.

The total restructuring cash flow in the year was £268 million (2015: £256 million).

Restructuring costs are included within administrative and other expenses in the consolidated income statement.

6 DIRECTORS AND EMPLOYEES EMPLOYMENT COSTS £ million 2016 2015 Wages and salaries 826 811 Social security costs 172 161 Pension costs (note 22) 34 75 Share-based payments (note 25) 29 25 1,061 1,072

Details of Directors’ emoluments and interests, and of key management compensation which represent related party transactions requiring disclosure under IAS 24, are provided within the Directors’ Remuneration Report. The Directors’ Remuneration Report, on pages 51-73, includes details on salary, benefits, pension and share plans. These disclosures form part of the financial statements.

NUMBER OF PEOPLE EMPLOYED BY THE GROUP DURING THE YEAR 2016 2015 At 30 At 30 September Average September Average Tobacco 27,900 28,700 30,500 29,300 Logistics 6,000 5,900 5,900 5,800 33,900 34,600 36,400 35,100

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NUMBER OF PEOPLE EMPLOYED BY THE GROUP BY LOCATION DURING THE YEAR 2016 2015 At 30 At 30

September Average September Average STRATEGY European Union 15,800 16,000 16,500 16,600 Americas 8,500 8,800 9,800 8,300 Rest of the World 9,600 9,800 10,100 10,200 33,900 34,600 36,400 35,100

7 NET FINANCE COSTS AND RECONCILIATION TO ADJUSTED NET FINANCE COSTS RECONCILIATION FROM REPORTED NET FINANCE COSTS TO ADJUSTED NET FINANCE COSTS PERFORMANCE £ million 2016 2015 Reported net finance costs 1,350 261 Fair value gains on derivative financial instruments 484 691 Fair value losses on derivative financial instruments (825) (578) Exchange (losses)/gains on financing activities (466) 113 Net fair value and exchange (losses)/gains on financial instruments (807) 226 Interest income on net defined benefit assets (note 22) 143 138

Interest cost on net defined benefit liabilities (note 22) (162) (157) GOVERNANCE Unwind of discount on redundancy and other long-term provisions – (1) Post-employment benefits net financing cost (19) (20) Adjusted net finance costs 524 467 Comprising Interest on bank deposits (7) (6) Interest on bank and other loans 531 473 Adjusted net finance costs 524 467 FINANCIALS 8 TAXATION ANALYSIS OF CHARGE IN THE YEAR £ million 2016 2015 Current tax UK corporation tax 33 36 Overseas tax 467 449 Total current tax 500 485 Deferred tax movement (262) (452) Total tax charged to the consolidated income statement 238 33

RECONCILIATION FROM REPORTED TAX TO ADJUSTED TAX The table below shows the tax impact of the adjustments made to reported profit before tax in order to arrive at the adjusted measure of earnings disclosed in note 10.

£ million 2016 2015 Reported tax 238 33 Deferred tax on amortisation of acquired intangibles 261 149 Tax on net fair value and exchange movement on financial instruments 80 (11) Tax on post-employment benefits net financing cost 7 6 Tax on restructuring costs 79 91 Tax on unrecognised losses (56) 273 Adjusted tax charge 609 541

The use of adjusted measures is explained in note 1, Accounting Policies (Use of Adjusted Measures).

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8 TAXATION CONTINUED FACTORS AFFECTING THE TAX CHARGE FOR THE YEAR The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the average of the enacted UK corporation tax rates for the year of 20.0 per cent (2015: 20.5 per cent) as follows:

£ million 2016 2015 Profit before tax 907 1,756 Tax at the UK corporation tax rate 181 360 Tax effects of: Differences in effective tax rates on overseas earnings (90) (110) Movement in provision for uncertain tax positions 43 44 Remeasurement of deferred tax balances (101) (310) Remeasurement of deferred tax balances arising from changes in tax rates – (13) Permanent differences 170 68 Adjustments in respect of prior years 35 (6) Total tax charged to the consolidated income statement 238 33

Differences in effective tax rates on overseas earnings represents the impact of worldwide profits being taxed at rates different from 20 per cent. The effective tax rate benefits from internal financing arrangements between group subsidiaries in different countries which are subject to differing tax rates and legislation and the application of double taxation treaties. The movement between 2015 and 2016 is largely driven by increased earnings in the USA and other jurisdictions where the tax rate is higher than 20 per cent.

Remeasurement of deferred tax balances mainly represents the recognition of deferred tax assets previously not recognised. Of the £101 million (2015: £310 million) remeasurement, most of which relates to the Group’s Spanish business, £89 million (2015: nil) relates to tax deductible amortisation and the balance of £12 million (2015: £310 million) relates to losses and other deferred tax assets. The 2015 remeasurement related to the recognition of deferred tax assets following the USA acquisition. The Group’s assessment of the recoverability of deferred tax assets is based on a review of underlying performance of subsidiaries, changes in tax legislation and the interpretation thereof and changes in the group structure.

Permanent differences include £79 million in respect of non-deductible exchange losses (2015: £33 million gains) and £31 million (2015: £18 million) in respect of non-deductible interest expenses.

MOVEMENT ON CURRENT TAX ACCOUNT £ million 2016 2015 At 1 October (111) (32) Charged to the consolidated income statement (500) (485) Charged to equity (6) (3) Cash paid 401 408 Exchange movements (24) – Other movements 1 1 At 30 September (239) (111)

The cash tax paid in the year is £99 million (2015: £77 million) less than the current tax charge. This arises as a result of timing differences between the accrual of income taxes and the actual payment of cash and the movement in the provision for uncertain tax positions.

ANALYSED AS: £ million 2016 2015 Assets 45 56 Liabilities (284) (167) (239) (111)

UNCERTAIN TAX POSITIONS As an international business the Group is exposed to uncertain tax positions and changes in legislation in the jurisdictions in which it operates. The Group’s uncertain tax positions principally include cross-border transfer pricing, interpretation of new or complex tax legislation and tax arising on the valuation of assets. The Group is also monitoring developments in relation to EU State Aid investigations but does not currently consider any provision is required. The assessment of uncertain tax positions is subjective and significant management judgement is required. This judgement is based on interpretation of legislation, management experience and professional advice.

Provisions arising from uncertain tax positions taken in the calculation of tax assets and liabilities are included within current tax liabilities. At 30 September 2016 the total value of these provisions, including foreign exchange movements, was £165 million (2015: £114 million). It is possible that amounts paid will be different from the amounts provided.

Management have assessed the Group’s provision for uncertain tax positions and are comfortable that apart from the French matter referred to below, the provisions in place are not material individually or in aggregate, and that a reasonably possible change in the next financial year would not have a material impact on the results of the Group.

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In November 2015 the Group received a challenge from the French tax authorities that could lead to additional tax liabilities of up to £253 million. The challenge concerns the valuation placed on the shares of Altadis Distribution France (now known as Logista France) following an intra group transfer of the shares in October 2012 and the tax consequences flowing from a potentially higher value that is argued for by the tax authorities. Based on professional advice, an amount of £41 million (2015: £23 million) is included in the provision for uncertain tax positions. STRATEGY

9 DIVIDENDS DISTRIBUTIONS TO ORDINARY EQUITY HOLDERS £ million 2016 2015 2014 Paid interim of 47.0 pence per share (2015: 91.9p, 2014: 38.8p) – Paid August 2014 – – 370 – Paid June 2015 – 204 – PERFORMANCE – Paid September 2015 – 204 – – Paid December 2015 – 468 – – Paid June 2016 225 – – – Paid September 2016 225 – – Interim dividend paid 450 876 370 Proposed interim of 54.1 pence per share (2015: nil, 2014: nil) – To be paid December 2016 516 ––

Interim dividend proposed 516 ––GOVERNANCE Proposed final of 54.1 pence per share (2015: 49.1p, 2014: 89.3p) – Paid February 2015 – – 851 – Paid March 2016 – 468 – – To be paid March 2017 516 – – Final dividend 516 468 851 Total ordinary share dividends of 155.2 pence per share (2015: 141.0p, 2014: 128.1p) 1,482 1,344 1,221

The third interim dividend for the year ended 30 September 2016 of 54.1 pence per share amounts to a proposed dividend of £516 million, FINANCIALS which will be paid in December 2016.

The proposed final dividend for the year ended 30 September 2016 of 54.1 pence per share amounts to a proposed dividend payment of £516 million in March 2017 based on the number of shares ranking for dividend at 30 September 2016, and is subject to shareholder approval. If approved, the total dividend paid in respect of 2016 will be £1,482 million (2015: £1,344 million). The dividend paid during 2016 is £1,386 million (2015: £1,259 million).

10 EARNINGS PER SHARE Basic earnings per share is based on the profit for the year attributable to the owners of the parent and the weighted average number of ordinary shares in issue during the year excluding shares held to satisfy the Group’s employee share schemes and shares purchased by the Company and held as treasury shares. Diluted earnings per share have been calculated by taking into account the weighted average number of shares that would be issued if rights held under the employee share schemes were exercised. No instruments have been excluded from the calculation for any period on the grounds that they are anti-dilutive.

£ million 2016 2015 Earnings: basic and diluted – attributable to owners of the Parent Company 631 1,691

Millions of shares Weighted average number of shares: Shares for basic earnings per share 954.0 953.4 Potentially dilutive share options 2.7 2.5 Shares for diluted earnings per share 956.7 955.9

Pence Basic earnings per share 66.1 177.4 Diluted earnings per share 66.0 176.9

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10 EARNINGS PER SHARE CONTINUED RECONCILIATION FROM REPORTED TO ADJUSTED EARNINGS AND EARNINGS PER SHARE 2016 2015 Earnings per Earnings per £ million unless otherwise indicated share (pence) Earnings share (pence) Earnings Reported basic 66.1 631 177.4 1,691 Acquisition costs – – 4.2 40 Amortisation of acquired intangibles 78.0 744 57.5 548 Net fair value and exchange movements on financial instruments 76.2 727 (22.7) (215) Post-employment benefits net financing cost 1.3 12 1.5 14 Restructuring costs 23.9 228 24.9 237 Tax on unrecognised losses 5.9 56 (28.6) (273) Adjustments above attributable to non-controlling interests (1.8) (17) (1.7) (16) Adjusted 249.6 2,381 212.5 2,026 Adjusted diluted 248.9 2,381 211.9 2,026

11 INTANGIBLE ASSETS 2016 Intellectual Supply £ million Goodwill property agreements Software Total Cost At 1 October 2015 11,698 10,672 1,179 244 23,793 Additions 3 16 – 51 70 Disposals – (7) – (14) (21) Exchange movements 1,930 1,789 179 28 3,926 At 30 September 2016 13,631 12,470 1,358 309 27,768

Amortisation and impairment At 1 October 2015 1,318 2,983 662 140 5,103 Amortisation charge for the year 1 – 911 99 34 1,044 Disposals – (7) – (10) (17) Exchange movements 215 590 107 22 934 Accumulated amortisation – 4,103 868 186 5,157 Accumulated impairment 1,533 374 – – 1,907 At 30 September 2016 1,533 4,477 868 186 7,064

Net book value At 30 September 2016 12,098 7,993 490 123 20,704

1. Amortisation of acquired intangibles excluded from adjusted operating profit comprises amortisation on intellectual property of £906 million (2015: £603 million) and amortisation on supply agreements of £99 million (2015: £94 million). No adjustment is made for amortisation on internally generated intellectual property of £5 million (2015: nil).

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2015 Intellectual Supply £ million Goodwill property agreements Software Total Cost STRATEGY At 1 October 2014 11,675 6,757 1,239 202 19,873 Additions – 16 – 44 60 Acquisitions 381 4,053 – 8 4,442 Exchange movements (358) (154) (60) (10) (582) At 30 September 2015 11,698 10,672 1,179 244 23,793

Amortisation and impairment

At 1 October 2014 1,386 2,432 597 124 4,539 PERFORMANCE Amortisation charge for the year – 603 94 23 720 Impairment charge for the year – 19 – – 19 Exchange movements (68) (71) (29) (7) (175) Accumulated amortisation – 2,609 662 140 3,411 Accumulated impairment 1,318 374 – – 1,692 At 30 September 2015 1,318 2,983 662 140 5,103

Net book value GOVERNANCE At 30 September 2015 10,380 7,689 517 104 18,690

Intellectual property mainly comprises brands acquired in the USA in 2015 and through the purchases of Altadis in 2008 and Commonwealth Brands in 2007.

Supply agreements include Logistics customer relationships and exclusive supply arrangements in Cuba. All were acquired under the purchase of Altadis.

Intangible amortisation and impairment are included within administrative and other expenses in the consolidated income statement. FINANCIALS Amortisation and impairment in respect of intangible assets other than software and internally generated intellectual property are treated as reconciling items between reported operating profit and adjusted operating profit.

GOODWILL AND INTANGIBLE ASSET IMPAIRMENT REVIEW Goodwill is allocated to groups of cash-generating units (CGUs) that are expected to benefit from the business combination in which the goodwill arose. For the Tobacco business CGUs are based on the markets where the business operates and are grouped in line with the divisional structure in operation during the year. The groupings represent the lowest level at which goodwill is monitored for internal management purposes. A summary of the carrying value of goodwill and intangible assets with indefinite lives is set out below.

2016 2015 Intangible Intangible assets with assets with indefinite indefinite £ million Goodwill lives Goodwill lives Returns Markets North 4,360 196 3,745 168 Returns Markets South 1,648 103 1,415 88 Growth 1,974 295 1,700 253 USA 2,427 – 2,071 – Tobacco 10,409 594 8,931 509 Logistics 1,689 – 1,449 – 12,098 594 10,380 509

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11 INTANGIBLE ASSETS CONTINUED

Goodwill has arisen principally on the acquisitions of Reemtsma in 2002 (all CGU groupings), Commonwealth Brands in 2007 (USA), Altadis in 2008 (all CGU groupings) and ITG Brands in 2015 (USA).

The Group tests goodwill and intangible assets with indefinite lives for impairment annually, or more frequently if there are any indications that impairment may have arisen. The value of a CGU, or group of CGUs as appropriate, is based on value-in-use calculations. These calculations use cash flow projections derived from three year financial plans which are approved by the Board annually and are based on detailed bottom-up market-by-market forecasts of projected sales volumes for each product line. These forecasts reflect, on an individual market basis, numerous assumptions and estimates regarding anticipated changes in market size, prices and duty regimes, consumer uptrading and downtrading, consumer preferences and other changes in product mix, based on long-term market trends, market data, anticipated regulatory developments, and management experience and expectations. We consider that pricing, market size, market shares and cost inflation are the key assumptions used in our plans.

GROWTH RATES AND DISCOUNT RATES USED The compound annual growth rates implicit in these value-in-use calculations are shown below.

2016 Pre-tax Initial growth Long-term % discount rate rate growth rate Returns Markets North 9.0 1.1 1.8 Returns Markets South 11.3 (0.1) 1.8 Growth Markets 9.1-15.8 4.7-10.4 1.2-4.0 USA 10.1 4.3 2.5 Logistics 9.6 6.5 1.8

Cash flows from the three year plan period are extrapolated out to year five using the growth rate implicit in the three year plan, shown in the table above as the initial growth rate. Estimated long-term weighted average compound annual growth rates of between 1.2 per cent and 4.0 per cent per annum are used beyond year five.

Long-term growth rates are based on management’s long-term expectations, taking account of industry specific factors such as the nature of our products, the role of excise in government fiscal policy, and relatively stable and predictable long-term macro trends in the Tobacco industry.

Discount rates used are based on the Group’s weighted average cost of capital adjusted for the different risk profiles of the CGUs.

Our impairment projections are prepared under the basis set out in IAS 36 which can differ from our internal plans.

GROWTH MARKETS Within our Growth Markets reporting segment, there are a number of CGU groupings based on our operating segments, including Drive Growth and Other Premium Cigar.

The Drive Growth CGU grouping includes our markets in Russia, Italy and Japan. Our impairment test for this CGU grouping indicated headroom of £210 million, and assumed an initial growth rate of 10.4 per cent. This growth rate reflects forecast benefits of increased investment behind growth brands and portfolio rationalisation, with significant investment in the earlier years forecast to deliver growth in the medium term. A reduction of around 50 per cent in the initial growth rate for these markets would cause the carrying value to equal the recoverable amount.

The impairment test for our Other Premium Cigar CGU grouping that includes our non-Cuban Premium Cigar business indicated headroom of £100 million. A reduction in overall forecast cash flows of 16 per cent, or a reduction in the initial growth rate of 370 basis points from 4.7 per cent, would cause the carrying value to equal the recoverable amount.

OTHER CGU GROUPINGS For the rest of the Group, any reasonable movement in the assumptions used in the impairment tests would not result in an impairment.

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12 PROPERTY, PLANT AND EQUIPMENT 2016 Plant and Fixtures and

£ million Property equipment motor vehicles Total STRATEGY Cost At 1 October 2015 926 1,816 366 3,108 Additions 6 137 21 164 Disposals (79) (121) (25) (225) Reclassifications 30 (12) (18) – Exchange movements 129 286 46 461 At 30 September 2016 1,012 2,106 390 3,508 PERFORMANCE Depreciation and impairment At 1 October 2015 169 955 216 1,340 Depreciation charge for the year 16 112 35 163 Impairment 15 22 – 37 Disposals (52) (106) (23) (181) Reclassifications 3 (3) – – Exchange movements 29 131 30 190 GOVERNANCE At 30 September 2016 180 1,111 258 1,549

Net book value At 30 September 2016 832 995 132 1,959

2015 Plant and Fixtures and £ million Property equipment motor vehicles Total FINANCIALS Cost At 1 October 2014 985 1,865 407 3,257 Additions 13 140 41 194 Acquisitions 34 58 14 106 Disposals (77) (80) (69) (226) Reclassifications 12 (11) (8) (7) Exchange movements (41) (156) (19) (216) At 30 September 2015 926 1,816 366 3,108

Depreciation and impairment At 1 October 2014 214 923 266 1,403 Depreciation charge for the year 11 98 33 142 Impairment – 58 1 59 Disposals (42) (64) (63) (169) Reclassifications – 3 (7) (4) Exchange movements (14) (63) (14) (91) At 30 September 2015 169 955 216 1,340

Net book value At 30 September 2015 757 861 150 1,768

The impairment charges in 2016 were mainly due to the proposed closure of our Logrono manufacturing facility, as announced in 2016. The impairment charges in 2015 were mainly due to the proposed closure of our Nottingham and Nantes manufacturing facilities, as announced in 2014.

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13 JOINT VENTURES The principal joint ventures are Corporación Habanos SA, Cuba and Altabana SL, Spain. Summarised financial information for the Group’s share of joint ventures, which are accounted for under the equity method, is shown below:

2016 Corporación £ million Habanos Altabana Others Total Revenue 53 122 34 209 Profit after tax 12 18 3 33

Non-current assets 211 7 11 229 Current assets 43 86 43 172 Total assets 254 93 54 401 Current liabilities (51) (25) (35) (111) Non-current liabilities (9) (1) (4) (14) Total liabilities (60) (26) (39) (125) Net assets 194 67 15 276

2015 Corporación £ million Habanos Altabana Others Total Revenue 46 114 31 191 Profit after tax 14 16 4 34

Non-current assets 181 7 10 198 Current assets 35 69 36 140 Total assets 216 76 46 338 Current liabilities (46) (24) (33) (103) Non-current liabilities (6) (2) – (8) Total liabilities (52) (26) (33) (111) Net assets 164 50 13 227

TRANSACTIONS AND BALANCES WITH JOINT VENTURES £ million 2016 2015 Sales to 67 59 Purchases from 77 60 Accounts receivable from 14 8 Accounts payable to (16) (7)

MOVEMENT ON INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD £ million 2016 2015 At 1 October 598 561 Profit for the year from joint ventures 28 29 Increase/(decrease) in investment in associates 5 (3) Foreign exchange 113 11 At 30 September 744 598

IFRS 11 Joint Arrangements came into effect for the Group from 1 October 2014. As a result of this standard the profit and loss items from joint ventures are shown in the consolidated income statement below net finance costs as “Share of investments accounted for using the equity method”. Similarly, the asset and liability amounts are classified as “Investments accounted for using the equity method”.

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14 INVENTORIES £ million 2016 2015 Raw materials 1,072 1,028 STRATEGY Work in progress 57 51 Finished inventories 2,215 1,609 Other inventories 154 154 3,498 2,842

Other inventories mainly comprise duty-paid tax stamps.

It is generally recognised industry practice to classify leaf tobacco inventory as a current asset although part of such inventory, because of

the duration of the processing cycle, ordinarily would not be consumed within one year. We estimate that around £280 million (2015: £358 million) PERFORMANCE of leaf tobacco held within raw materials will not be utilised within a year of the balance sheet date.

15 TRADE AND OTHER RECEIVABLES 2016 2015 £ million Current Non-current Current Non-current Trade receivables 2,477 – 2,278 – Less: provision for impairment of receivables (59) – (54) –

Net trade receivables 2,418 – 2,224 – GOVERNANCE Other receivables 119 72 103 66 Prepayments and accrued income 134 17 127 18 2,671 89 2,454 84

Trade receivables may be analysed as follows:

2016 2015 £ million Current Non-current Current Non-current

Within credit terms 2,357 – 2,137 – FINANCIALS Past due by less than 3 months 55 – 52 – Past due by more than 3 months 6 – 35 – Amounts that are impaired 59 – 54 – 2,477 – 2,278 –

16 CASH AND CASH EQUIVALENTS £ million 2016 2015 Cash at bank and in hand 1,266 2,018 Short-term deposits and other liquid assets 8 24 1,274 2,042

£119 million (2015: £137 million) of total cash and cash equivalents is held in countries in which prior approval is required to transfer the funds abroad. Nevertheless, if the Group complies with these requirements, such liquid funds are at its disposition within a reasonable period of time.

17 TRADE AND OTHER PAYABLES 2016 2015 £ million Current Non-current Current Non-current Trade payables 946 – 987 – Other taxes, duties and social security contributions 6,124 – 5,075 – Other payables 182 – 171 – Accruals and deferred income 739 17 562 13 7,991 17 6,795 13

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18. BORROWINGS The Group’s borrowings are held at amortised cost, are as follows.

£ million 2016 2015 Current borrowings Bank loans and overdrafts 95 53 Capital market issuance: European commercial paper (ECP) 978 359 €500m 4.0% notes due December 2015 – 380 €1,500m 8.375% notes due February 2016 – 1,165 £450m 5.5% notes due November 2016 471 – Total current borrowings 1,544 1,957

Non-current borrowings Bank loans 925 1,479 Capital market issuance: £450m 5.5% notes due November 2016 – 471 $1,250m 2.05% notes due February 2018 966 825 €850m 4.5% notes due July 2018 739 634 $500m 2.05% notes due July 2018 387 330 £200m 6.25% notes due December 2018 210 210 £500m 7.75% notes due June 2019 510 510 €750m 5.0% notes due December 2019 672 576 $1,250m 2.95% notes due July 2020 968 826 €1,000m 2.25% notes due February 2021 869 745 £1,000m 9.0% notes due February 2022 1,055 1,054 $1,250m 3.75% notes due July 2022 968 827 $1,000m 3.5% notes due February 2023 773 660 £600m 8.125% notes due March 2024 626 626 $1,500m 4.25% notes due July 2025 1,155 986 €650m 3.375% notes due February 2026 569 488 £500m 5.5% notes due September 2026 499 499 £500m 4.875% notes due June 2032 503 504 Total non-current borrowings 12,394 12,250 Total borrowings 13,938 14,207 Analysed as: Capital market issuance 12,918 12,675 Bank loans and overdrafts 1,020 1,532

Current and non-current borrowings include interest payable of £24 million (2015: £95 million) and £199 million (2015: £208 million) respectively as at the balance sheet date.

Interest payable on capital market issuances are at the fixed rates of interest and interest payable on bank loans and overdrafts are at floating rates of interest, including non-current bank loans which comprise committed USD term loan facilities due to mature between one and two years.

On 11 December 2015 €500 million 4.0 per cent notes were repaid and on 17 February 2016 €1,500 million 8.375 per cent notes were repaid. On 29 September 2016 $300 million of bank term loans were repaid and cancelled.

All borrowings are unsecured and the Group has not defaulted on any borrowings during the year (2015: no defaults).

NON-CURRENT FINANCIAL LIABILITIES The maturity profile of the carrying amount of the Group’s non-current liabilities as at 30 September 2016 (including net derivative financial instruments detailed in note 20) is as follows:

2016 2015 Net derivative Net derivative financial financial liabilities/ liabilities/ £ million Borrowings (assets) Total Borrowings (assets) Total Amounts maturing: Between one and two years 3,017 (39) 2,978 1,457 67 1,524 Between two and five years 3,229 9 3,238 4,405 (127) 4,278 In five years or more 6,148 613 6,761 6,388 (106) 6,282 12,394 583 12,977 12,250 (166) 12,084

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FAIR VALUE OF BORROWINGS The fair value of borrowings as at 30 September 2016 is estimated to be £15,439 million (2015: £15,004 million). £14,419 million (2015: £13,472 million) relates to capital market issuance and has been determined by reference to market prices as at the balance sheet date. A comparison of the carrying amount and fair value of capital market issuance by currency is provided below. The fair value of all other borrowings is considered STRATEGY to equal their carrying amount.

2016 2015 Balance sheet Balance sheet £ million amount Fair value amount Fair value GBP 3,874 4,835 3,874 4,518 EUR 3,827 4,122 4,347 4,493 USD 5,217 5,462 4,454 4,461

Total capital market issuance 12,918 14,419 12,675 13,472 PERFORMANCE

UNDRAWN BORROWING FACILITIES At 30 September the Group had the following undrawn committed facilities:

£ million 2016 2015 Amounts maturing: In less than one year 301 –

Between one and two years – 739 GOVERNANCE Between two and five years 2,941 2,594 3,242 3,333

During the year, the €1 billion facility maturing in July 2017 was reduced by €650 million, and the €2,835 million and £500 million facilities were extended by twelve months, both now maturing in July 2021.

19. FINANCIAL RISK FACTORS

FINANCIAL RISK MANAGEMENT FINANCIALS Overview In the normal course of business, the Group is exposed to financial risks including, but not limited to, market, credit and liquidity risk. This note explains the Group’s exposure to these risks, how they are measured and assessed, and summarises the policies and processes used to manage them, including those related to the management of capital.

The Group operates a centralised treasury function which is responsible for the management of the financial risks of the Group, together with its financing and liquidity requirements. Financial risks comprise exposures to funding and liquidity, interest rate, foreign exchange and counterparty credit risk. The treasury function is also responsible for the financial risk management of the Group’s global pension schemes. The Group operates on a global basis and manages its capital to ensure that subsidiaries are able to operate as going concerns and to optimise returns to shareholders through an appropriate balance of debt and equity.

The Group’s treasury activities are monitored by the Treasury Committee, which meets regularly throughout the year and comprises the Chief Financial Officer, the Company Secretary and other senior management from finance and treasury. The Treasury Committee operates in accordance with the terms of reference set out by the Board and a framework (the Treasury Committee framework) which sets out the expectations and boundaries to assist in the effective oversight of treasury activities. The Director of Treasury reports on a regular basis to the Treasury Committee.

The Board reviews and approves all major treasury decisions. The treasury function does not operate as a profit centre, nor does it enter into speculative transactions.

The Group’s management of financial risks cover the following:

(A) MARKET RISK Price risk The Group is not exposed to equity securities price risk other than assets held by its pension funds disclosed in note 22. The Group is exposed to commodity price risk in that there may be fluctuations in the price of tobacco leaf. As with other agricultural commodities, the price of tobacco leaf tends to be cyclical as supply and demand considerations influence tobacco plantings in those countries where tobacco is grown. Also, different regions may experience variations in weather patterns that may affect crop quality or supply and so lead to changes in price. The Group seeks to reduce this price risk by sourcing tobacco leaf from a number of different countries and counterparties and by varying the levels of tobacco leaf held. Currently, these techniques reduce the expected exposure to this risk over the short to medium term to levels considered not material and accordingly, no sensitivity analysis has been presented.

Foreign exchange risk The Group is exposed to movements in foreign exchange rates due to its commercial trading transactions and profits denominated in foreign currencies, as well as the translation of cash, borrowings and derivatives held in non-functional currencies.

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19. FINANCIAL RISK FACTORS CONTINUED The Group’s financial results are principally exposed to fluctuations in euro and US dollar exchange rates. Management of the Group’s foreign exchange transaction and translation risk is addressed below.

Transaction risk The Group’s material transaction exposures arise on costs denominated in currencies other than the functional currencies of subsidiaries, including the purchase of tobacco leaf, which is sourced from various countries but purchased principally in US dollars, and packaging materials which are sourced from various countries and purchased in a number of currencies. The Group’s sterling dividends to external shareholders are primarily sourced from foreign subsidiary earnings. Foreign currency flows are matched where possible and remaining foreign currency transaction exposures are not hedged.

Translation risk The Group seeks to broadly match the currency of borrowings to the currency of its underlying investments in overseas subsidiaries, which are primarily euros and US dollars. The Group issues debt in the most appropriate market or markets at the time of raising new finance and has a policy of using derivative financial instruments, primarily cross-currency swaps, to change the currency of debt as required. Borrowings denominated in, or swapped into foreign currencies to match the Group’s investments in overseas subsidiaries are treated as a hedge against the net investment where appropriate.

Foreign exchange sensitivity analysis The Group’s sensitivity to foreign exchange rates attributable to the translation of monetary items held by Group companies in currencies other than their functional currencies is illustrated on an indicative basis below. The sensitivity analysis has been prepared on the basis that net debt and the proportion of financial instruments in foreign currencies remain constant, and that there is no change to the net investment hedge designations in place at 30 September 2016. The sensitivity analysis does not reflect any change to revenue or non-finance costs that may result from changing exchange rates, and ignores any tax implications and offsetting effects of movements in the fair value of derivative financial instruments.

2016 2015 Increase in Increase in £ million income income Income statement impact of non-functional currency foreign exchange exposures: 10% appreciation of euro (2015: 10%) 458 60 10% appreciation of US dollar (2015: 10%) 46 13

An equivalent depreciation in the above currencies would cause a decrease in income of £560 million and £57 million for euro and US dollar exchange rates respectively (2015: £73 million and £16 million).

Movements in equity in the table below relate to hedging instruments designated as net investment hedges in hedging the Group’s euro denominated assets.

2016 2015 Change in Change in £ million equity equity Equity impact of non-functional currency foreign exchange exposures: 10% appreciation of euro (2015: 10%) 494 751 10% appreciation of US dollar (2015: 10%) 83 101

An equivalent depreciation in the above currencies would result in a change in equity of -£604 million and -£102million for euro and US dollar exchange rates respectively (2015: -£918 million and -£124 million).

At 30 September 2016, after the effect of derivative financial instruments, approximately -1 per cent (2015: -2 per cent) of the Group’s net debt was denominated in sterling, 58 per cent in euro (2015: 60 per cent), 43 per cent in US dollars (2015: 45 per cent), and nil per cent in other currencies (2015: -3 per cent).

Interest rate risk The Group’s interest rate risk arises from its borrowings net of cash and cash equivalents, with the primary exposures arising from fluctuations in euro, US dollar and sterling interest rates. Borrowings at variable rates expose the Group to cash flow interest rate risk. Borrowings at fixed rates expose the Group to fair value interest rate risk.

The Group manages its exposure to interest rate risk on its borrowings by entering into derivative financial instruments, principally interest rate swaps, to achieve an appropriate mix of fixed and floating interest rate debt in accordance with the Treasury Committee framework.

As at 30 September 2016, after adjusting for the effect of derivative financial instruments detailed in note 20, approximately 71 per cent (2015: 46 per cent) of net debt was at fixed rates of interest and 29 per cent (2015: 54 per cent) was at floating rates of interest.

Interest rate sensitivity analysis The Group’s sensitivity to interest rates on its euro, US dollar and sterling monetary items which are primarily external borrowings, cash and cash equivalents, is illustrated on an indicative basis below. The impact in the Group’s Income Statement reflects the effect on net finance costs in respect of the Group’s net debt and the fixed to floating rate debt ratio prevailing at 30 September 2016, ignoring any tax implications and offsetting effects of movements in the fair value of derivative financial instruments.

The sensitivity analysis has been prepared on the basis that net debt and the derivatives portfolio remain constant and that there is no net impact on other comprehensive income (2015: £nil).

The movement in interest rates is considered reasonable for the purpose of this analysis and the estimated effect assumes a lower limit of zero for interest rates where relevant.

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2016 2015 Change in Change in £ million income income Income statement impact of interest rate movements: STRATEGY +/- 1% increase in euro interest rates (2015: 1%) 17 72 +/- 1% increase in US dollar interest rates (2015: 1%) 23 53 +/- 1% increase in sterling interest rates (2015: 1%) – 3

(B) CREDIT RISK The Group is primarily exposed to credit risk arising from trade receivables due from its customers, cash deposits and amounts due from external financial counterparties on financial instruments held with them. The maximum aggregate credit risk to these sources is considered to be £4,860 million at 30 September 2016 (2015: £5,296 million). PERFORMANCE

Trade and other receivables The Group has some significant concentrations of customer credit risk. In order to manage its exposure to customer credit risk, policies have been implemented to ensure that sales of products are made to customers with an appropriate credit history and that credit support guarantees are obtained where appropriate. Analysis of trade and other receivables is provided in note 15.

Financial instruments In order to manage its credit risk to any one counterparty, the Group places cash deposits and enters into derivative financial instruments with a diversified group of financial institutions carrying suitable credit ratings in line with the Treasury Committee framework. Utilisation GOVERNANCE of counterparty credit limits is regularly monitored by treasury and ISDA agreements are in place to permit the net settlement of assets and liabilities in certain circumstances. In a few historical cases, collateral has been deposited against derivative financial liabilities and supported by an ISDA Credit Support Annex.

The table below summarises the Group’s largest exposures to financial counterparties as at 30 September 2016. At the balance sheet date management does not expect these counterparties to default on their current obligations. The impact of the Group’s own credit risk on the fair value of derivatives and other obligations held at fair value is not considered to be material.

2016 2015

Maximum Maximum FINANCIALS exposure to exposure to S&P credit credit risk S&P credit credit risk Counterparty exposure rating £ million rating £ million Highest AA- 150 AA- 153 2nd highest AA- 125 AA- 131 3rd highest AA- 87 AA- 114 4th highest A+ 85 A 114 5th highest BBB+ 52 A+ 112

(C) LIQUIDITY RISK The Group is exposed to liquidity risk, which represents the risk of having insufficient funds to meet its financing needs in any particular location when needed. To manage this risk the Group has a policy of actively maintaining a mixture of short, medium and long-term committed facilities that are designed to ensure that the Group has sufficient available funds to meet the forecast requirements of the Group over the short to medium term. To prevent over-reliance on individual sources of liquidity, funding is provided across a range of instruments including debt capital market issuance, bank term loans, bank revolving credit facilities and European commercial paper.

The Group primarily borrows centrally in order to meet forecast funding requirements, and the treasury function is in regular dialogue with subsidiary companies to ensure their liquidity needs are met. Subsidiary companies are funded by a combination of share capital and retained earnings, intercompany loans, and in very limited cases through external local borrowings. Cash pooling processes are used to centralise surplus cash held by subsidiaries where possible in order to minimise external borrowing requirements and interest costs. Treasury invests surplus cash in bank deposits and uses foreign exchange contracts to manage short-term liquidity requirements in line with cash flow forecasts. As at 30 September 2016, the Group held liquid assets of £1,274 million (2015: £2,042 million).

The table below summarises the Group’s non-derivative financial liabilities by maturity based on their contractual cash flows as at 30 September 2016. The amounts disclosed are undiscounted cash flows calculated using spot rates of exchange prevailing at the relevant balance sheet date. Contractual cash flows in respect of the Group’s derivative financial instruments are detailed in note 20.

2016 Balance sheet Contractual Between 1 and Between 2 and £ million amount cash flows total <1 year 2 years 5 years > 5 years Non-derivative financial liabilities: Bank loans 1,020 1,038 105 933 – – Capital market issuance 12,918 15,767 1,947 2,576 4,303 6,941 Trade and other payables 946 946 946 – – – Total non-derivative financial liabilities 14,884 17,751 2,998 3,509 4,303 6,941

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19. FINANCIAL RISK FACTORS CONTINUED 2015 Balance sheet Contractual Between 1 and Between 2 and £ million amount cash flows total <1 year 2 years 5 years > 5 years Non-derivative financial liabilities: Bank loans 1,532 1,573 71 1,000 502 – Capital market issuance 12,675 15,897 2,374 1,022 5,061 7,440 Trade and other payables 987 987 987 – – – Total non-derivative financial liabilities 15,194 18,457 3,432 2,022 5,563 7,440

Capital management The Group defines capital as adjusted net debt and equity and manages its capital structure through an appropriate balance of debt and equity in order to drive an efficient financing mix for the Group. Besides the minimum capitalisation rules that may apply to subsidiaries in different countries, the Group’s only external imposed capital requirements are interest cover and gearing covenants contained within its core external bank debt facilities, with which the Group was fully compliant during the current and prior periods and expects to be so going forward.

The Group continues to target an investment grade credit rating which it monitors by reference to a number of key financial ratios, including ongoing consideration of the return of capital to shareholders via regular dividend payments and in ongoing discussions with the relevant ratings agencies.

As at 30 September 2016 the Group was rated Baa3/stable outlook by Moody’s Investor Service Ltd, BBB/stable outlook by Standard and Poor’s Credit Market Services Europe Limited and BBB/stable outlook by Fitch Ratings Limited.

HEDGE ACCOUNTING The Group hedges its underlying exposures in an efficient, commercial and structured manner in line with the policies above, although the strict hedging requirements of IAS 39 may lead to some commercially effective hedge positions not qualifying for hedge accounting. As a result, and as permitted under IAS 39, the Group has decided not to apply cash flow or fair value hedge accounting in respect of these transactions.

The Group does apply hedge accounting in respect of certain net investments in foreign operations where appropriate. The hedge of a net investment in a foreign operation is a hedge of the translation foreign currency risk arising on the foreign operation. As at 30 September 2016 the Group had made net investment hedge designations in foreign operations in respect of external euro borrowings with a carrying value of €4,387 million (2015: €5,237 million), US dollar borrowings with a carrying value of $7,950 million (2015: $6,750 million), and cross-currency swaps with a notional value of €3,871 million (2015: €3,871 million).

The Group also treats certain permanent intragroup loans that meet relevant qualifying criteria under IAS 21 as part of its net investment in foreign operations where appropriate. Intragroup loans with a notional value of €1,943 million (2015: €2,077 million) and US dollar loans with a notional value of $6,761 million (2015: $5,077 million) were treated as part of the Group’s net investment in foreign operations at the balance sheet date.

FAIR VALUE ESTIMATION AND HIERARCHY All financial assets and liabilities are carried on the balance sheet at amortised cost, other than derivative financial instruments which are carried at fair value. Derivative financial instruments are valued using techniques based significantly on observable market data such as yield curves and foreign exchange rates as at the balance sheet date (Level 2 classification hierarchy per IFRS 7) as detailed in note 20. There were no changes to the valuation methods or transfers between hierarchies during the year. With the exception of capital market issuance, the fair value of all financial assets and financial liabilities is considered approximate to their carrying amount as outlined in note 18.

NETTING ARRANGEMENTS OF FINANCIAL INSTRUMENTS The following tables set out the Group’s financial assets and financial liabilities that are subject to netting and set-off arrangements. Financial assets and liabilities that are subject to set-off arrangements and disclosed on a net basis in the Group’s Balance Sheet primarily relate to cash pooling arrangements and collateral in respect of derivative financial instruments under ISDA Credit Support Annex. Amounts which do not meet the criteria for offsetting on the balance sheet but could be settled net in certain circumstances principally relate to derivative transactions executed under ISDA agreements where each party has the option to settle amounts on a net basis in the event of default of the other party.

2016 Gross Gross financial Net financial Related financial assets/ assets/ amounts not assets/ liabilities liabilities per set-off in the £ million liabilities set-off balance sheet balance sheet Net Assets Derivative financial instruments 1,243 (134) 1,109 (1,069) 40 Cash and cash equivalents 1,678 (404) 1,274 – 1,274 2,921 (538) 2,383 (1,069) 1,314 Liabilities Derivative financial instruments (1,898) 134 (1,764) 1,069 (695) Bank loans and overdrafts (499) 404 (95) – (95) (2,397) 538 (1,859) 1,069 (790)

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2015 Gross Gross financial Net financial Related financial assets/ assets/ amounts not

assets/ liabilities liabilities per set-off in the STRATEGY £ million liabilities set-off balance sheet balance sheet Net Assets Derivative financial instruments 1,016 (41) 975 (607) 368 Cash and cash equivalents 3,281 (1,239) 2,042 – 2,042 4,297 (1,280) 3,017 (607) 2,410 Liabilities Derivative financial instruments (801) 41 (760) 607 (153) Bank loans and overdrafts (1,292) 1,239 (53) – (53) PERFORMANCE (2,093) 1,280 (813) 607 (206)

20. DERIVATIVE FINANCIAL INSTRUMENTS The Group’s derivative financial instruments are held at fair value, are as follows.

2016 2015 £ million Assets Liabilities Net Fair Value Assets Liabilities Net Fair Value Current derivative financial instruments GOVERNANCE Interest rate swaps 32 (60) (28) 55 (20) 35 Foreign exchange contracts 9 (11) (2) 13 (5) 8 Cross-currency swaps 5 (121) (116) 6 – 6 Total current derivatives 46 (192) (146) 74 (25) 49 Collateral¹ – 74 74 – – – 46 (118) (72) 74 (25) 49 Non-current derivative financial instruments

Interest rate swaps 1,063 (1,279) (216) 666 (753) (87) FINANCIALS Cross-currency swaps – (427) (427) 235 (23) 212 Total non-current derivatives 1,063 (1,706) (643) 901 (776) 125 Collateral¹ – 60 60 – 41 41 1,063 (1,646) (583) 901 (735) 166 Total carrying value of derivative financial instruments 1,109 (1,764) (655) 975 (760) 215 Analysed as: Interest rate swaps 1,095 (1,339) (244) 721 (773) (52) Foreign exchange contracts 9 (11) (2) 13 (5) 8 Cross-currency swaps 5 (548) (543) 241 (23) 218 Collateral¹ – 134 134 – 41 41 Total carrying value of derivative financial instruments 1,109 (1,764) (655) 975 (760) 215

1. Collateral deposited against derivative financial liabilities under the terms and conditions of an ISDA Credit Support Annex Fair values are determined based on observable market data such as yield curves and foreign exchange rates to calculate the present value of future cash flows associated with each derivative at the balance sheet date. The classification of these derivative assets and liabilities under the IFRS 7 fair value hierarchy is provided in note 19.

MATURITY OF OBLIGATIONS UNDER DERIVATIVE FINANCIAL INSTRUMENTS Derivative financial instruments have been classified in the balance sheet as current or non-current on an undiscounted contractual basis based on spot rates as at the balance sheet date. Some of the Group’s derivative financial instruments contain early termination options. For the purposes of the above and following analysis, maturity dates have been based on the likelihood of an option being exercised with consideration to counterparty expectations and market conditions prevailing as at 30 September 2016. Any collateral transferred to counterparties in respect of derivative financial liabilities has been classified consistently with the related underlying derivative.

The table below summarises the Group’s derivative financial instruments by maturity based on their remaining contractual cash flows as at 30 September 2016. The amounts disclosed are the undiscounted cash flows calculated using spot rates of exchange prevailing at the relevant balance sheet date. Contractual cash flows in respect of the Group’s non-derivative financial instruments are detailed in note 19.

2016 Contractual Balance sheet cash flows Between 1 and Between 2 and £ million amount total <1 year 2 years 5 years >5 years Net settled derivatives (205) (374) (23) (6) (136) (209) Gross settled derivatives (450) – receipts 5,717 2,038 24 835 2,820 – payments (5,906) (1,990) (107) (975) (2,834) (655) (563) 25 (89) (276) (223)

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20. DERIVATIVE FINANCIAL INSTRUMENTS CONTINUED 2015 Contractual Balance sheet cash flows Between 1 and Between 2 and £ million amount total <1 year 2 years 5 years >5 years Net settled derivatives (20) (183) 18 (7) (13) (181) Gross settled derivatives 235 – receipts 4,660 921 528 752 2,459 – payments (5,405) (976) (550) (974) (2,905) 215 (928) (37) (29) (235) (627)

DERIVATIVES AS HEDGING INSTRUMENTS As outlined in note 19, the Group hedges its underlying interest rate exposure and foreign currency translation exposures in an efficient, commercial and structured manner, primarily using interest rate swaps and cross-currency swaps. Foreign exchange contracts are used to manage the Group’s short-term liquidity requirements in line with cash flow forecasts as appropriate.

The Group does not apply cash flow or fair value hedge accounting, as permitted under IAS 39, which results in fair value gains and losses attributable to derivative financial instruments being recognised in net finance costs unless they are designated as hedges of a net investment in foreign operations, in which case they are recognised in other comprehensive income.

Interest rate swaps To manage interest rate risk on its borrowings, the Group issues debt in the market or markets that are most appropriate at the time of raising new finance with regard to currency, interest denomination or duration and then uses interest rate swaps to re-base the debt into the appropriate proportions of fixed and floating interest rates where necessary. Interest rate swaps are also transacted to manage and re-profile the Group’s interest rate risk over the short, medium and long-term in accordance with the Treasury Committee framework. Fair value movements are recognised in net finance costs in the relevant reporting period.

As at 30 September 2016, the notional amount of interest rate swaps outstanding that were entered into to convert fixed rate borrowings into floating rates of interest at the time of raising new finance were £11,676 million equivalent (2015: £11,667 million equivalent) with a fair value of £1,093 million asset (2015: £721 million asset). The fixed interest rates vary from 2.0 per cent to 8.7 per cent (2015: 2.0 per cent to 8.7 per cent), and the floating rates are EURIBOR, LIBOR and US LIBOR.

As at 30 September 2016, the notional amount of interest rate swaps outstanding that were entered into to convert floating rate debt into fixed rates of interest to manage and re-profile the Group’s interest rate risk were £12,462 million equivalent (2015: £10,692 million equivalent) with a fair value of £1,298 million liability (2015: £741 million liability). The fixed interest rates vary from 0.8 per cent to 5.2 per cent (2015: 0.8 per cent to 5.2 per cent), and the floating rates are EURIBOR, LIBOR and US LIBOR. This includes forward starting interest rate swaps with a total notional amount of £2,459 million equivalent (2015: £4,990 million equivalent) with tenors extending for five years, starting between May 2017 and May 2022.

Cross-currency swaps The Group enters into cross-currency swaps to convert the currency of debt into the appropriate currency with consideration to the underlying assets of the Group as appropriate. Fair value movements are recognised in net finance costs in the relevant reporting period unless they are designated as hedges of a net investment in foreign operations, in which case they are recognised in other comprehensive income.

As at 30 September 2016, the notional amount of cross-currency swaps entered into to convert issued fixed rate debt into the desired currency at floating rates of interest was £650 million (2015: £650 million) and the fair value of these swaps was £56 million net liability (2015: £5 million net liability).

As at 30 September 2016, the notional amount of cross-currency swaps entered into to convert floating rate sterling debt into the desired currency at floating rates of interest was £3,100 million (2015: £3,100 million) and the fair value of these swaps was £392 million net liability (2015: £232 million net asset).

HEDGES OF NET INVESTMENTS IN FOREIGN OPERATIONS As at 30 September 2016, cross-currency swaps with a notional amount of €3,871 million (2015: €3,871 million) were designated as hedges of net investments in foreign operations. During the year, foreign exchange translation losses amounting to £474 million (2015: £202 million gains) were recognised in other comprehensive income in respect of cross-currency swaps that had been designated as hedges of a net investment in foreign operations.

FOREIGN EXCHANGE CONTRACTS The Group enters into foreign exchange contracts to manage short-term liquidity requirements in line with cash flow forecasts. As at 30 September 2016 the notional amount of these contracts was £1,531 million equivalent (2015: £867 million equivalent) and the fair value of these contracts was a net liability of £2 million (2015: £8 million net asset).

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21. DEFERRED TAX ASSETS AND LIABILITIES Deferred tax assets and liabilities are offset only when there is a legally enforceable right to set off current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority. The following amounts, determined after appropriate STRATEGY offsetting, are shown in the consolidated balance sheet.

DEFERRED TAX ASSETS 2016 Accelerated depreciation Other and Retirement Fair value temporary £ million amortisation benefits movements differences Total At 1 October 2015 104 49 – 380 533 PERFORMANCE Charged /(credited) to consolidated income statement (21) 8 – 41 28 Credited to other comprehensive income – 108 – – 108 Transfers (221) 75 – 85 (61) Exchange movements (88) 29 – 82 23 At 30 September 2016 (226) 269 – 588 631

2015

Accelerated GOVERNANCE depreciation Other and Retirement Fair value temporary £ million amortisation benefits movements differences Total At 1 October 2014 1 101 1 138 241 Credited/(charged) to consolidated income statement 42 (3) (1) 268 306 Charged to other comprehensive income – (7) – – (7) Transfers 43 (41) – (20) (18) Other movements – – – 4 4

Exchange movements 18 (1) – (10) 7 FINANCIALS At 30 September 2015 104 49 – 380 533

DEFERRED TAX LIABILITIES 2016 Accelerated depreciation Other and Retirement Fair value temporary £ million amortisation benefits movements differences Total At 1 October 2015 (1,334) 125 – 39 (1,170) Credited/(charged) to consolidated income statement 159 (16) – 91 234 Credited to other comprehensive income – 7 – – 7 Transfers 221 (75) – (85) 61 Exchange movements (189) 6 – 17 (166) At 30 September 2016 (1,143) 47 – 62 (1,034)

2015 Accelerated depreciation Other and Retirement Fair value temporary £ million amortisation benefits movements differences Total At 1 October 2014 (1,600) 52 – 118 (1,430) Credited/(charged) to consolidated income statement 97 (4) – 53 146 Credited to other comprehensive income – 12 – – 12 Acquisitions – 26 – 10 36 Transfers 122 40 – (144) 18 Exchange movements 47 (1) – 2 48 At 30 September 2015 (1,334) 125 – 39 (1,170)

DEFERRED TAX EXPECTED TO BE RECOVERED WITHIN 12 MONTHS £ million 2016 2015 Deferred tax assets 351 188 Deferred tax liabilities (246) (227) 105 (39)

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21. DEFERRED TAX ASSETS AND LIABILITIES CONTINUED DEFERRED TAX EXPECTED TO BE RECOVERED IN MORE THAN 12 MONTHS £ million 2016 2015 Deferred tax assets 280 345 Deferred tax liabilities (788) (943) (508) (598)

Within other temporary differences, deferred tax assets of £345 million (2015: £331 million) are recognised for tax losses carried forward to the extent that the realisation of the related tax benefit through future taxable profits is probable.

As at the balance sheet date, deferred tax assets of £125 million (2015: £78 million) have not been recognised due to the potential uncertainty of the utilisation of the underlying tax losses in certain jurisdictions. Of these unrecognised deferred tax assets £6 million are expected to expire in 2017, £9 million (2015: £15 million) are expected to expire within five years and nil (2015: £26 million) are expected to expire between 2022 and 2027.

Also within other temporary differences, deferred tax assets of £15 million (2015: £2 million) are recognised for tax credits carried forward to the extent that the realisation of the tax related benefit through future taxable profits is probable. Deferred tax assets of £159 million (2015: £143 million) have not been recognised due to the potential uncertainty of the utilisation of the credits. Of these unrecognised deferred tax assets £63 million are expected to expire between 2021 and 2027.

We have reviewed the recoverability of deferred tax assets in overseas territories in the light of forecast business performance, changes in tax legislation and the interpretation thereof. Consequently, we have increased deferred tax assets of £118 million (2015: £308 million increase) previously not recognised on the basis that it is more likely than not that these are recoverable. The increase principally relates to the Group’s Spanish business.

The aggregate amount of temporary differences associated with undistributed earnings of subsidiaries for which deferred tax liabilities have not been recognised is £5 billion (2015: £5 billion). A provision of £50 million (2015: £50 million) has been made for taxation expected to arise on the planned future remittance of earnings totalling £1.6 billion (2015: £1.7 billion) from various subsidiaries. No liability has been recognised in respect of other differences because the Group is in a position to control the timing of the reversal of the temporary differences, and it is probable that such differences will not reverse in the foreseeable future.

Finance (No. 2) Act 2015 and the Finance Bill 2016 (which is substantively enacted at the balance sheet date) have reduced the UK corporation tax rate to 19% from 1 April 2017 and to 17% from 1 April 2020. These proposed changes are reflected in the deferred tax balances.

22. RETIREMENT BENEFIT SCHEMES The Group operates a number of retirement benefit schemes for its employees, including both defined benefit and defined contribution schemes. The Group’s three principal schemes are defined benefit schemes and are operated by Imperial Tobacco Limited in the UK, Reemtsma Cigarettenfabriken GmbH in Germany and ITG Brands in the USA; these schemes represent 65 per cent, 11 per cent and 7 per cent of the Group’s total retirement benefit obligations and 44 per cent, 17 per cent and 11 per cent of the current service cost respectively.

IMPERIAL TOBACCO PENSION FUND The UK scheme, the Imperial Tobacco Pension Fund or ITPF, is a voluntary final salary pension scheme with a normal retirement age of 60 for most members. The ITPF was offered to employees who joined the company before 1 October 2010 and has a weighted average maturity of 20 years. The population comprises 65 per cent in respect of pensioners, 33 per cent in respect of deferred members and 2 per cent in respect of current employees. New employees in the UK are now offered a defined contribution scheme. Should surplus funds arise in the defined benefit section they may be used to finance defined contribution section contributions on the Company’s behalf with company contributions reduced accordingly.

The ITPF operates under trust law and is managed and administered by the Trustees on behalf of the members in accordance with the terms of the Trust Deed and Rules and relevant legislation. The ITPF’s assets are held by the trust.

Annual increases in benefits in payment are dependent on inflation so the main uncertainties affecting the level of benefits payable under the ITPF are future inflation levels (including the impact of inflation on future salary increases and any salary increases above inflation) and the actual longevity of the membership.

The contributions paid to the ITPF are set by the ITPF Scheme Actuary every three years. The Scheme Actuary is an external consultant, appointed by the Trustees. Principal factors that the Scheme Actuary will have regard to include the covenant offered by the Group, the level of risk in the ITPF, the expected returns on the ITPF’s assets, the results of the funding assessment on an ongoing basis and the expected cost of securing benefits if the fund were to be wound up.

The latest valuation of the ITPF was carried out as at 31 March 2013 when the market value of the invested assets was £2,957 million. Based on the ongoing funding target the total assets were sufficient to cover 100 per cent of the benefits that had accrued to members for past service, after allowing for expected future pay increases. The total assets were sufficient to cover 90 per cent of the total benefits that had accrued to members for past service and future service benefits for current members. In compliance with the Pensions Act 2004, Imperial Tobacco Limited and the Trustee agreed a scheme-specific funding target, a statement of funding principles and a schedule of contributions accordingly.

Following the valuation, the level of employer’s contributions to the scheme was increased from £31 million per year. The Company paid £47.5 million on 31 March 2014, £52.5 million on 31 March 2015 and £57.5 million on 31 March 2016 and agreed to pay £65 million each year for the subsequent 12 years. Further contributions were agreed to be paid by the Company in the event of a downgrade of the Group’s credit rating to non-investment grade by either Standard & Poor’s or Moody’s. In addition, surety guarantees with a total value of £400 million and a parental guarantee with Imperial Brands PLC have been put in place.

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The Scheme Actuary prepares an annual update of the funding position as at 31 March each year. The latest actuarial valuation (31 March 2016) is currently being undertaken but the outcome of this valuation is not yet concluded. The previous annual update at 31 March 2015 showed a surplus of £329 million in relation to past service accrued benefits. STRATEGY The main risk for the Group in respect of the ITPF is that additional contributions are required if the investment returns are not sufficient to pay for the benefits (which will be influenced by the factors noted above). The level of equity returns will be a key determinant of overall investment return. The investment portfolio is also subject to a range of other risks typical of the asset classes held, in particular exposure to equity markets, credit risk on bonds and exposure to the property market.

The IAS 19 liability measurement of the defined benefit obligation (DBO) and the current service cost are sensitive to the assumptions made about future inflation and salary growth levels, as well as the assumptions made about life expectation. They are also sensitive to the discount rate, which depends on market yields on sterling denominated AA corporate bonds. The main differences between the funding

and IAS 19 assumptions are a more prudent longevity assumption for funding and a different approach to setting the discount rate. A PERFORMANCE consequence of the ITPF’s investment strategy, with a significant proportion of the assets invested in equities and other return-seeking assets, is that the difference between the market value of the assets and the IAS 19 liabilities may be relatively volatile.

THE REEMTSMA CIGARETTENFABRIKEN PENSION PLAN The German scheme, the Reemtsma Cigarettenfabriken Pension Plan (RCPP), is primarily a career average pension plan that is open to new entrants, though a small closed group of members has final salary benefits. It has a weighted average maturity of 19 years. The scheme population comprises 53 per cent in respect of pensioners, 16 per cent in respect of deferred members and 31 per cent in respect of current employees.

The plan is unfunded and the company pays benefits as they arise. The plan’s obligations arise under a works council agreement and are GOVERNANCE subject to standard German legal requirements around such matters as the benefits to be provided to employees who leave service, and pension increases in payment. Over the next year Reemtsma Cigarettenfabriken GmbH expects to pay £22 million in respect of benefits.

Annual increases in benefits in payment are dependent on inflation so the main uncertainties affecting the level of benefits payable under the plan are future inflation levels and the actual longevity of the membership.

The IAS 19 liability measurement of the DBO and the current service cost are sensitive to the assumptions made about the above variables, as well as the discount rate, which depends on market yields on euro denominated AA corporate bonds. FINANCIALS ITG BRANDS HOURLY PENSION PLAN The main USA pension scheme, the ITG Brands Hourly Pension Plan (ITGBH), is a defined benefit pension plan that is open to new entrants. It has a weighted average maturity of 11 years. The population comprises 68 per cent in respect of pensioners, 4 per cent in respect of deferred members and 28 per cent in respect of current employees.

The plan is funded and benefits are paid from the plan assets. Contributions to the plan are determined based on US regulatory requirements and ITG Brands is not expected to make any contributions in the next year.

Annual benefits in payment do not increase. The main uncertainty affecting the level of benefits payable under the plan is the actual longevity of the membership. Other key uncertainties impacting the plan include investment risk and potential past service benefit changes from future negotiations.

The IAS 19 liability measurement of the DBO and the service cost are sensitive to the assumptions made about the above variables, as well as the discount rate, which depends on market yields on US dollar denominated AA corporate bonds.

OTHER PLANS Other plans of the Group include various pension plans, other post-employment and long-term employee benefit plans in several countries of operation. Many of the plans are funded, with assets backing the obligations held in separate legal vehicles such as trusts, others are operated on an unfunded basis. The benefits provided, the approach to funding and the legal basis of the plans reflect their local territories. IAS 19 requires that the discount rate for calculating the DBO and service cost is set according to the level of relevant market yields on corporate bonds where the market is considered “deep”, or government bonds where it is not.

The results of the most recent available actuarial valuations for the various plans have been updated to 30 September 2016 in order to determine the amounts to be included in the Group’s consolidated financial statements. The aggregate IAS 19 position is as follows:

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22. RETIREMENT BENEFIT SCHEMES CONTINUED DEFINED BENEFIT PLANS 2016 2015 £ million DBO Assets Total DBO Assets Total At 1 October (4,790) 3,973 (817) (4,315) 3,535 (780) Consolidated income statement expense Current service cost (57) – (57) (48) – (48) Past service credit – Spanish free tobacco settlement 32 – 32 – – – Past service credit – curtailment 16 – 16 2 – 2 Cost of termination benefits (7) – (7) (8) – (8) Net interest (expense)/income on net defined benefit (liability)/asset (162) 143 (19) (157) 138 (19) Administration costs paid from plan assets – (3) (3) – (2) (2) Cost recognised in the income statement (38) (75) Remeasurements Actuarial gain due to liability experience 52 – 52 37 – 37 Actuarial loss due to financial assumption changes (1,160) – (1,160) (121) – (121) Actuarial gain/(loss) due to demographic assumption changes 10 – 10 (2) – (2) Return on plan assets excluding amounts included in net interest (expense)/income above – 494 494 – 58 58 Remeasurement effects recognised in OCI (604) (28) Cash Employer contributions – 127 127 101 101 Employee contributions (1) 1 – (2) 2 – Benefits paid directly by the company 43 (43) – 36 (36) – Benefits paid from plan assets 202 (202) – 175 (175) – Net cash 127 101 Other Obligations and assets of acquired operations – – – (437) 367 (70) Spanish free tobacco settlement 1 27 (13) 14 – – – Exchange movements (304) 143 (161) 50 (15) 35 Total other (147) (35) At 30 September (6,099) 4,620 (1,479) (4,790) 3,973 (817)

1. During the year ended 30 September 2016 we reached agreements in Spain with both current employees and a proportion of pensioners who would have received or had previously received payments in respect of former entitlements to free cigarettes to accept one-off cash payments in full settlement. Payments to current employees were disbursed during the year. The cash settlement to pensioners was paid in October 2016 and the liability was recognised in the balance sheet at 30 September 2016 in other liabilities. Termination benefits in the year ended 30 September 2016 mainly relate to restructuring activity in Germany, the UK and the USA. The curtailment gain arises as a result of the closure of the Mullingar factory in Ireland and restructuring activity in the USA.

RETIREMENT BENEFIT SCHEME COSTS CHARGED TO OPERATING PROFIT £ million 2016 2015 Defined benefit costs in operating profit 19 56 Defined contribution costs in operating profit 18 21 Total retirement benefit scheme costs in operating profit 37 77

Split as follows in the consolidated income statement:

£ million 2016 2015 Cost of sales 14 27 Distribution, advertising and selling costs 13 30 Administrative and other expenses 10 20 Total retirement benefit scheme costs in operating profit 37 77

ASSETS AND LIABILITIES RECOGNISED IN THE CONSOLIDATED BALANCE SHEET £ million 2016 2015 Retirement benefit assets 5 92 Retirement benefit liabilities (1,484) (909) Net retirement benefit liability (1,479) (817)

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KEY FIGURES AND ASSUMPTIONS USED FOR MAJOR PLANS 2016 2015 £ million unless otherwise indicated ITPF RCPP ITGBH ITPF RCPP ITGBH

Defined benefit obligation (DBO) 3,979 658 437 3,093 482 361 STRATEGY Fair value of scheme assets (3,632) – (419) (3,178) – (355) Net defined benefit liability/(asset) 347 658 18 (85) 482 6 Current service cost 25 10 6 26 9 2 Employer contributions 58 20 – 53 19 – Principal actuarial assumptions used (% per annum) Discount rate 2.3 1.2 3.7 3.7 2.3 4.3 Future salary increases 3.5 2.7 n/a 3.5 2.9 n/a Future pension increases 3.0 1.6 n/a 3.0 1.8 n/a PERFORMANCE Inflation 3.0 1.6 n/a 3.0 1.8 n/a

2016 ITPF RCPP ITGBH Male Female Male Female Male Female Life expectancy at age 65 years: Member currently aged 65 21.7 23.1 19.1 23.1 20.3 22.7 GOVERNANCE Member currently aged 50 23.0 24.6 21.1 25.1 21.5 24.0

2015 ITPF RCPP ITGBH Male Female Male Female Male Female Life expectancy at age 65 years: Member currently aged 65 21.6 23.0 18.9 22.9 19.0 23.1 Member currently aged 50 22.9 24.5 20.9 24.8 21.0 25.0 FINANCIALS

Assumptions regarding future mortality experience are set based on advice that uses published statistics and experience in each territory. In particular for the ITPF, SAPS tables are used with various adjustments for different groups of members, reflecting observed experience. The largest group of members uses the SAPS All Pensioner Male Amounts table with a 109.8 per cent multiplier. An allowance for improvements in longevity is made using the CMI improvement rates with a long-term trend of 1.25 per cent per annum.

SENSITIVITY ANALYSIS FOR KEY ASSUMPTION AT THE END OF THE REPORTING PERIOD Sensitivity analysis is illustrative only and is provided to demonstrate the degree of sensitivity of results to key assumptions. Generally, estimates are made by re-performing calculations with one assumption modified and all others held constant.

2016 2015 % increase in DBO ITPF RCPP ITGBH ITPF RCPP ITGBH Discount rate: 0.5% decrease 10.3 10.1 5.8 8.1 9.1 5.7 Rate of inflation: 0.5% decrease (8.1) (7.1) n/a (6.6) (6.3) n/a One year increase in longevity for a member currently age 65, corresponding changes at other ages 3.5 4.8 4.0 3.5 4.7 3.3

The sensitivity to the inflation assumption change includes corresponding changes to the future salary increases and future pension increases assumptions, but is assumed to be independent of any change to discount rate.

We estimate that a 0.5 per cent decrease/(increase) in the discount rate at the start of the reporting period would have increased/(decreased) the consolidated income statement pension expense by approximately £16 million.

An approximate split of the major categories of ITPF scheme assets is as follows:

2016 2015 Percentage Percentage of ITPF of ITPF £ million unless otherwise indicated Fair value scheme assets Fair value scheme assets Equities 1,598 44 1,380 43 Bonds – index linked government 981 27 762 24 Bonds – corporate and other 581 16 536 17 Property 436 12 455 15 Other – including derivatives, commodities and cash 36 1 45 1 3,632 100 3,178 100

The majority of the assets are quoted.

Excluding any self-investment through pooled fund holdings, the ITPF investments in financial instruments of Imperial Brands PLC amounted to £6 million (2015: £2 million).

www.imperialbrandsplc.comwww.imperialbrandsplc.com 113 NOTES TO THE FINANCIAL STATEMENTS CONTINUED

22. RETIREMENT BENEFIT SCHEMES CONTINUED An approximate split of the major categories of ITGBH scheme assets is as follows:

2016 2015 Percentage Percentage of ITGBH of ITGBH £ million unless otherwise indicated Fair value scheme assets Fair value scheme assets Investment funds 276 66 312 88 Equities – – 6 2 Bonds – fixed government 61 15 23 6 Bonds – corporate and other 59 14 2 1 Other – including derivatives, commodities and cash 23 5 12 3 419 100 355 100

The majority of the assets are non-quoted.

23. PROVISIONS 2016 £ million Restructuring Other Total At 1 October 2015 278 139 417 Additional provisions charged to the consolidated income statement 128 67 195 Amounts used (137) (19) (156) Unused amounts reversed (2) (39) (41) Exchange movements 37 23 60 At 30 September 2016 304 171 475

Analysed as:

£ million 2016 2015 Current 188 197 Non-current 287 220 475 417

Restructuring provisions relate mainly to our cost optimisation programme (see note 5).

Other provisions principally relate to commercial legal claims and disputes and are expected to be used over a period of up to 10 years.

24. SHARE CAPITAL £ million 2016 2015 Authorised, issued and fully paid 1,036,000,000 ordinary shares of 10p each (2015: 1,036,000,000) 104 104

On 6 March 2014, 31,942,881 shares held in Treasury were cancelled creating the Capital Redemption reserve.

25. SHARE SCHEMES The Group operates four types of share-based incentive programmes, designed to incentivise staff and to encourage them to build a stake in the Group.

SHARE MATCHING SCHEME Awards are made to eligible employees who are invited to invest a proportion of their eligible bonus in shares for a period of three years, after which matching shares are awarded on a 1:1 ratio, plus dividend equivalents.

LONG TERM INCENTIVE PLAN (LTIP) Awards of shares under the LTIP are made to the Executive Directors and senior executives at the discretion of the Remuneration Committee. They vest three years after grant and are subject to performance criteria. Dividend equivalents accrue on vested shares.

SHARESAVE PLAN Options are granted to eligible employees who participate in a designated savings scheme for a three year period. Historically they were also granted for a five year period.

114 Imperial Brands Brands PLC | Annual | Annual Report Report and and Accounts Accounts 20162016 OVERVIEW

DISCRETIONARY SHARE AWARDS PLAN (DSAP) Under the DSAP, one-off conditional awards are made to individuals to recognise exceptional contributions within the business. Awards, which are not subject to performance conditions and under which vested shares do not attract dividend roll-up, will normally vest on the STRATEGY third anniversary of the date of grant subject to the participant’s continued employment. The limit of an award under the DSAP is capped at 25 per cent of the participant’s salary at the date of grant. Shares used to settle awards under the DSAP will be market purchased.

Further details of the schemes including additional criteria applying to Directors and some senior executives are set out in the Directors’ Remuneration Report.

ANALYSIS OF CHARGE TO THE CONSOLIDATED INCOME STATEMENT £ million 2016 2015

Share Matching Scheme 21 19 PERFORMANCE Long Term Incentive Plan 5 3 Sharesave Plan 3 3 29 25

The awards are predominantly equity settled. The balance sheet liability in respect of cash settled schemes at 30 September 2016 was £2.6 million (2015: £3.0 million).

RECONCILIATION OF MOVEMENTS IN AWARDS/OPTIONS GOVERNANCE 2016 Share Sharesave matching LTIP Sharesave DSAP weighted average Thousands of shares unless otherwise indicated scheme awards awards options awards exercise price £ Outstanding at 1 October 2015 2,730 959 1,519 – 21.05 Granted 730 409 329 19 25.40 Lapsed/cancelled (313) (209) (287) – 21.18 Exercised (882) (59) (476) – 18.57

Outstanding at 30 September 2016 2,265 1,100 1,085 19 24.73 FINANCIALS Exercisable at 30 September 2016 – – 23 – 18.66

2015 Share Sharesave matching LTIP Sharesave weighted average Thousands of shares unless otherwise indicated scheme awards awards options exercise price £ Outstanding at 1 October 2014 2,708 769 1,578 19.36 Granted 827 404 442 25.40 Lapsed/cancelled (170) (197) (94) 19.64 Exercised (635) (17) (407) 19.72 Outstanding at 30 September 2015 2,730 959 1,519 21.05 Exercisable at 30 September 2015 – – 47 17.66

The weighted average Imperial Brands PLC share price at the date of exercise of awards and options was £36.24 (2015: £29.71). The weighted average fair value of sharesave options granted during the year was £6.68 (2015: £5.84).

www.imperialbrandsplc.comwww.imperialbrandsplc.com 115115 NOTES TO THE FINANCIAL STATEMENTS CONTINUED

25. SHARE SCHEMES CONTINUED SUMMARY OF AWARDS/OPTIONS OUTSTANDING AT 30 SEPTEMBER 2016 Number of Vesting period Exercise price awards/options remaining of options Thousands of shares unless otherwise indicated outstanding in months outstanding £ Share Matching Scheme 2014 841 4 n/a 2015 706 16 n/a 2016 718 28 n/a Total awards outstanding 2,265

Long Term Incentive Plan 2014 300 1 n/a 2015 391 17 n/a 2016 409 29 n/a Total awards outstanding 1,100

Sharesave Plan 2012 28 – 20.45 2013 56 – 18.40 2014 319 10 20.40 2015 355 22 25.40 2016 327 34 29.68 Total options outstanding 1,085

Discretionary Share Awards Plan 2016 19 26 n/a Total options outstanding 19

The vesting period is the period between the grant of awards or options and the earliest date on which they are exercisable. The vesting period remaining and the exercise price of options outstanding are weighted averages. Participants in the Sharesave Plan have six months from the maturity date to exercise their option. Participants in the LTIP have seven years from the end of the vesting period to exercise their option. The exercise price of the options is fixed over the life of each option.

PRICING For the purposes of valuing options to calculate the share-based payment charge, the Black-Scholes option pricing model has been used for the Share Matching Scheme and Sharesave Plan. A summary of the assumptions used in the Black-Scholes model for 2016 and 2015 is as follows.

2016 2015 Share matching Sharesave DSAP Share matching Sharesave Risk-free interest rate % 0.8 0.1-0.3 1.0 1.1 0.3-1.5 Volatility (based on 3 or 5 year history) % 23.0 22.8-23.8 23.4 22.0 22.5-23.0 Expected lives of options granted years 3 3 3 3 3 Dividend yield % 5.4 4.6-5.2 5.4 5.2 5.1-5.2 Fair value £ 30.25 6.14-6.69 31.45 25.88 5.33-6.18 Share price used to determine exercise price £ 35.54 37.10-37.51 36.54 30.25 31.75-32.63 Exercise price £ n/a 29.68 n/a n/a 25.40

Market conditions were incorporated into the Monte Carlo method used in determining the fair value of LTIP awards at grant date. Assumptions in 2016 and 2015 are given in the following table.

% 2016 2015 Future Imperial Brands share price volatility 18.9-19.9 18.0 Future Imperial Brands dividend yield 3.6-3.9 5.2 Share price volatility of the tobacco and alcohol comparator group 16.0-35.0 14.0-32.0 Correlation between Imperial Tobacco and the alcohol and tobacco comparator group 37.0 30.0

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EMPLOYEE SHARE OWNERSHIP TRUSTS The Imperial Tobacco Group PLC Employee and Executive Benefit Trust and the Imperial Tobacco Group PLC 2001 Employee Benefit Trust (the Trusts) have been established to acquire ordinary shares in the Company to satisfy rights to shares arising on the exercise and STRATEGY vesting of options and awards. The purchase of shares by the Trusts has been financed by a gift of £19.2 million and an interest free loan of £181.9 million. In addition the Group has gifted treasury shares to the Trusts. None of the Trusts’ shares has been allocated to employees or Executive Directors as at 30 September 2016. All finance costs and administration expenses connected with the Trusts are charged to the consolidated income statement as they accrue. The Trusts have waived their rights to dividends and the shares held by the Trusts are excluded from the calculation of basic earnings per share.

SHARES HELD BY EMPLOYEE SHARE OWNERSHIP TRUSTS Millions of shares 2016 2015 PERFORMANCE At 1 October 3.2 4.2 Distribution of shares held by Employee Share Ownership Trusts (1.3) (1.0) Gift of treasury shares 1.6 – At 30 September 3.5 3.2

The shares in the Trusts are accounted for on a first in first out basis and comprise 0.5 million (2015: 0.4 million) shares acquired in the open market at a cost of £13.2 million (2015: £7.9 million) and 3.0 million (2015: 2.8 million) treasury shares gifted to the Trusts by the Group. There were £1.6 million (2015: nil) shares gifted in the financial year 2016. GOVERNANCE 26. TREASURY SHARES Shares purchased under the Group’s buyback programme are normally held in a separate treasury reserve and represent a deduction from equity shareholders’ funds, and are only cancelled if the number of treasury shares approaches 10 percent of issued share capital. During the year the Group purchased no shares (2015: nil) and cancelled no shares (2015: nil).

Millions of shares 2016 2015 At 1 October 78.9 78.9

Gifted to Employee Share Ownership Trusts (1.6) – FINANCIALS At 30 September 77.3 78.9 Percentage of issued share capital 7.5 7.6

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27. COMMITMENTS CAPITAL COMMITMENTS £ million 2016 2015 Contracted but not provided for: Property, plant and equipment and software 162 133

OPERATING LEASE COMMITMENTS Total future minimum lease payments under non-cancellable operating leases consist of leases where payments fall due:

2016 2015 £ million Property Other Total Property Other Total Within one year 42 15 57 36 10 46 Between one and five years 99 22 121 88 11 99 Beyond five years 32 – 32 32 – 32 173 37 210 156 21 177

A review of operating leases has identified three leases with a total commitment greater than £10 million. A summary of these commitments is detailed below.

The French head office lease commenced on 1 January 2015 for a term of 10 years, due to terminate on 31 December 2024. Currently there is an annual commitment of €1.8 million. There is the option to terminate the lease on 30 June 2021, subject to six months notice, and an option to partially terminate the lease (1 floor and parking spaces) on 31 March 2018, subject to an indemnity of six months rent.

The German head office lease commenced on 1 January 2014 for a term of 10 years, due to terminate on 31 December 2024. Currently there is an annual commitment of €3.1 million which is price index graduated on an annual basis. There is the option to terminate up to 30 per cent of the remaining lease space from 31 December 2019 to 31 December 2023, subject to notice of 14 months and a pro-rata payment penalty. There is also the option to renew the lease for a period of five years, subject to this being agreed prior to 31 December 2016 otherwise the lease can be renewed on a year by year basis.

The Logista head office lease commenced on 1 January 2015 for a term of nine years, due to terminate on 31 December 2023. Currently there is an annual commitment of €1.8 million which is price index reviewed on an annual basis. There is the option to terminate the lease on 31 December 2021, subject to an indemnity of two months rent, and an option to extend the lease at expiry for a further nine years.

28. LEGAL PROCEEDINGS The Group is currently involved in a number of legal cases in which claimants are seeking damages for alleged smoking and health related effects. In the opinion of the Group’s lawyers, the Group has meritorious defences to these actions, all of which are being vigorously contested. Although it is not possible to predict the outcome of the pending litigation, the Directors believe that the pending actions will not have a material adverse effect upon the results of the operations, cash flow or financial condition of the Group. Consequently, the Group has not provided for any amounts in respect of these cases in the financial statements. For further details see page 49 of the Directors’ Report.

29. ACQUISITIONS There have been no acquisitions during the year ended 30 September 2016.

On 12 June 2015 the Group completed the purchase of the Winston, Salem, Kool and Maverick cigarette brands and the blu e-cigarette brand from Reynolds, together with the national sales force, office and production facilities previously owned by Lorillard for a cash consideration of $7,056 million (£4,613 million). There have been no adjustments to provisional fair values of this acquisition in the year ended 30 September 2016.

30. NET DEBT The movements in cash and cash equivalents, borrowings, and derivative financial instruments in the year were as follows:

Derivative Cash and cash Current Non-current financial £ million equivalents borrowings borrowings instruments Total At 1 October 2015 2,042 (1,957) (12,250) 215 (11,950) Reallocation of current borrowings from non-current borrowings – (471) 471 – – Cash flow (956) 1,017 723 209 993 Accretion of interest – 94 (13) (23) 58 Change in fair values – – – (1,056) (1,056) Exchange movements 188 (227) (1,325) – (1,364) At 30 September 2016 1,274 (1,544) (12,394) (655) (13,319)

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ANALYSIS BY DENOMINATION CURRENCY 2016 £ million GBP EUR USD Other Total

Cash and cash equivalents 212 275 471 316 1,274 STRATEGY Total borrowings (3,868) (3,901) (6,144) (25) (13,938) (3,656) (3,626) (5,673) 291 (12,664) Effect of cross currency swaps 3,629 (4,172) – – (543) (27) (7,798) (5,673) 291 (13,207) Derivative financial instruments (112) Net debt (13,319)

PERFORMANCE 2015 £ million GBP EUR USD Other Total Cash and cash equivalents 341 737 598 366 2,042 Total borrowings (3,858) (4,390) (5,942) (17) (14,207) (3,517) (3,653) (5,344) 349 (12,165) Effect of cross currency swaps 3,782 (3,570) – – 212 265 (7,223) (5,344) 349 (11,953)

Derivative financial instruments 3 GOVERNANCE Net debt (11,950)

ADJUSTED NET DEBT Management monitors the Group’s borrowing levels using adjusted net debt which excludes interest accruals and the fair value of derivative financial instruments providing commercial cash flow hedges.

£ million 2016 2015 Reported net debt (13,319) (11,950) FINANCIALS Accrued interest 221 279 Fair value of derivatives providing commercial hedges 216 25 Adjusted net debt (12,882) (11,646)

31. RECONCILIATION OF CASH FLOW TO MOVEMENT IN NET DEBT £ million 2016 2015 (Decrease)/increase in cash and cash equivalents (956) 686 Cash flows relating to derivative financial instruments 209 (139) Increase in borrowings (897) (4,720) Repayment of borrowings 2,637 380 Change in net debt resulting from cash flows 993 (3,793) Other non-cash movements including revaluation of derivative financial instruments (998) 389 Exchange movements (1,364) (20) Movement in net debt during the year (1,369) (3,424) Opening net debt (11,950) (8,526) Closing net debt (13,319) (11,950)

32. CHANGES IN NON-CONTROLLING INTERESTS There have been no changes in non-controlling interests in the current or prior year.

33. RELATED UNDERTAKINGS In accordance with Section 409 of the Companies Act 2006 a full list of subsidiaries, partnerships, associates, and joint ventures, the principal activity, the country of incorporation and the effective percentage of equity owned by the Imperial Brands PLC, as at 30 September 2016, are provided in the entity financial statements of Imperial Brands PLC. There are no material related parties other than Group companies.

www.imperialbrandsplc.comwww.imperialbrandsplc.com 119 INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF IMPERIAL BRANDS PLC

REPORT ON THE PARENT COMPANY FINANCIAL STATEMENTS OUR OPINION In our opinion, Imperial Brands PLC’s Parent Company financial statements (the financial statements):

– give a true and fair view of the state of the Parent Company’s affairs as at 30 September 2016; – have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and – have been prepared in accordance with the requirements of the Companies Act 2006.

WHAT WE HAVE AUDITED The financial statements, included within the Annual Report and Accounts (the Annual Report), comprise:

– The Balance Sheet as at 30 September 2016; – The Statement of Changes in Equity for the year then ended; and – the notes to the financial statements, which include a summary of significant accounting policies and other explanatory information. Certain required disclosures have been presented elsewhere in the Annual Report, rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as audited.

The financial reporting framework that has been applied in the preparation of the financial statements is United Kingdom Accounting Standards, comprising FRS 101 “Reduced Disclosure Framework”, and applicable law (United Kingdom Generally Accepted Accounting Practice).

OTHER REQUIRED REPORTING CONSISTENCY OF OTHER INFORMATION Companies Act 2006 reporting In our opinion, the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements.

ISAs (UK & Ireland) reporting Under International Standards on Auditing (UK and Ireland) (ISAs (UK & Ireland)) we are required to report to you if, in our opinion, information in the Annual Report is:

– materially inconsistent with the information in the audited financial statements; or – apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Parent Company acquired in the course of performing our audit; or – otherwise misleading. We have no exceptions to report arising from this responsibility.

ADEQUACY OF ACCOUNTING RECORDS AND INFORMATION AND EXPLANATIONS RECEIVED Under the Companies Act 2006 we are required to report to you if, in our opinion:

– we have not received all the information and explanations we require for our audit; or – adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or – the financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns.

We have no exceptions to report arising from this responsibility.

DIRECTORS’ REMUNERATION Directors’ remuneration report – Companies Act 2006 opinion In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006.

Other Companies Act 2006 reporting Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of Directors’ remuneration specified by law are not made. We have no exceptions to report arising from this responsibility.

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RESPONSIBILITIES FOR THE FINANCIAL STATEMENTS AND THE AUDIT OUR RESPONSIBILITIES AND THOSE OF THE DIRECTORS As explained more fully in the Statement of Directors’ Responsibilities, the Directors are responsible for the preparation of the financial STRATEGY statements and for being satisfied that they give a true and fair view.

Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.

This report, including the opinions, has been prepared for and only for the Parent Company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. PERFORMANCE WHAT AN AUDIT OF FINANCIAL STATEMENTS INVOLVES We conducted our audit in accordance with ISAs (UK & Ireland). An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of:

– whether the accounting policies are appropriate to the Parent Company’s circumstances and have been consistently applied and adequately disclosed;

– the reasonableness of significant accounting estimates made by the Directors; and GOVERNANCE – the overall presentation of the financial statements. We primarily focus our work in these areas by assessing the Directors’ judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements.

We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both. FINANCIALS In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

OTHER MATTER We have reported separately on the Group financial statements of Imperial Brands PLC for the year ended 30 September 2016.

John Maitland (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors

Bristol

8 November 2016

www.imperialbrandsplc.comwww.imperialbrandsplc.com 121121 IMPERIAL BRANDS PLC BALANCE SHEET AT 30 SEPTEMBER

£ million Notes 2016 2015 Fixed assets Investments iii 7,968 7,968

Current Assets Debtors iv 9,063 67

Creditors: amounts falling due within one year v (1) (1) Net current assets 9,062 66 Total assets less current assets 17,030 8,034 Net assets 17,030 8,034

Capital and reserves Called up share capital vi 104 104 Capital redemption reserve 3 3 Share premium account 5,833 5,833 Profit and loss account 11,090 2,094 Total shareholders’ funds 17,030 8,034

The financial statements on pages 122 to 133 were approved by the Board of Directors on 8 November 2016 and signed on its behalf by:

Mark Williamson Oliver Tant Chairman Director

IMPERIAL BRANDS PLC STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 SEPTEMBER

Share premium and capital Retained £ million Share capital redemption Earnings Total Equity At 1 October 2015 104 5,836 2,094 8,034 Operating profit – – 37 37 Dividends received – – 10,345 10,345 Total comprehensive income – – 10,382 10,382 Transactions with owners Dividends paid – – (1,386) (1,386) At 30 September 2016 104 5,836 11,090 17,030

At 1 October 2014 104 5,836 1,864 7,804 Operating profit – – (11) (11) Dividends received – – 1,500 1,500 Total comprehensive income – – 1,489 1,489 Transactions with owners Dividends paid – – (1,259) (1,259) At 30 September 2015 104 5,836 2,094 8,034

122 Imperial Brands | Annual Report and Accounts 2016 www.imperialbrandsplc.com 122 NOTES TO THE FINANCIAL STATEMENTS OF IMPERIAL BRANDS PLC OVERVIEW

I ACCOUNTING POLICIES BASIS OF PREPARATION AND STATEMENT OF COMPLIANCE WITH FRS 101

These financial statements were prepared in accordance with the Companies Act 2006, Financial Reporting Standard 101 Reduced STRATEGY Disclosure Framework (FRS 101) and applicable accounting standards.

The Company has undergone transition from reporting under UK GAAP to Financial Reporting Standard 101, ‘Reduced Disclosure Framework’ (FRS 101). The financial statements have therefore been prepared in accordance with FRS 101, as issued by the Financial Reporting Council.

The financial statements have been prepared on the historical cost basis. Historical cost is generally based on the fair value of the consideration given in exchange for the assets.

On transition the Company has applied IFRS 1 paragraphs 6-33 as adopted by the EU, as required under FRS 100 paragraph 11(b). As a result PERFORMANCE of the transition there has been no change to the result for the year or to total equity as at 30 September 2015.

As permitted by section 408(3) of the Companies Act 2006, no separate profit and loss account has been presented for the Company. As permitted by FRS 101, the Company has taken advantage of the disclosure exemptions available in the preparation of the financial statements, as detailed below:

– Paragraph 38 of IAS 1 ‘Presentation of financial statements’ – comparative information requirements in respect of: (i) paragraph 79(a)(iv) of IAS 1; GOVERNANCE (ii) paragraph 118(e) of IAS 38 ‘Intangible assets’ – reconciliations between the carrying amount at the beginning and end of the period;

– The following paragraphs of IAS 1 ‘Presentation of financial statements’: (i) 10(d) – statement of cash flows;

(ii) 10(f) – a statement of financial position as at the beginning of the preceding period when an entity applied an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statement;

(iii) 16 – statement of compliance with all IFRS; FINANCIALS

(iv) 38A – requirement for minimum of two primary statements, including cash flow statements;

(v) 38B-D – additional comparative information;

(vi) 40A-D – requirements for a third statement of financial position;

(vii) 111 – cash flow information; and

(viii) 134-136 – capital management disclosures;

– IAS 7 ‘Statement of cash flows’; – Paragraph 30 and 31 of IAS 8 ‘Accounting Policies, changes in accounting estimates and errors’ – requirement for the disclosure of information when an entity has not applied a new IFRS that has been issued but is not yet effective; – Paragraph 17 of IAS 24 ‘Related party disclosures’ – key management compensation; – The requirements in IAS 24 ‘Related party disclosures’ to disclose related party transactions entered into between two or more members of a group; – IFRS 7 ‘Financial Instruments: Disclosures’; – Paragraphs 91 to 99 of IFRS 13 ‘Fair value measurement’ – disclosure of valuation techniques and inputs used for fair value measurement of assets and liabilities; and – The requirements of IFRS 1 ‘First-time adoption of International Financial Reporting Standards’ to present a statement of financial position at the date of transition. The principal accounting policies, which have been applied consistently, are set out below.

INVESTMENTS Investments held as fixed assets comprise the Company’s investment in subsidiaries and are shown at historic purchase cost less any provision for impairment. Investments are tested for impairment annually to ensure that the carrying value of the investment is supported by their recoverable amount.

DIVIDENDS Final dividends are recognised as a liability in the period in which the dividends are approved by shareholders, whereas interim dividends are recognised in the period in which the dividends are paid. Dividends receivable are recognised as an asset when they are approved.

FINANCIAL INSTRUMENTS Financial assets and financial liabilities are recognised when the Company becomes a party to the contractual provisions of the relevant instrument. Financial assets are de-recognised when the rights to receive benefits have expired or been transferred, and the Company has transferred substantially all risks and rewards of ownership. Financial liabilities are de-recognised when the obligation is extinguished.

123 Imperial Brands PLC | Annual Report and Accounts 2016 www.imperialbrandsplc.com 123 NOTES TO THE FINANCIAL STATEMENTS OF IMPERIAL BRANDS PLC CONTINUED

I ACCOUNTING POLICIES CONTINUED Non-derivative financial assets are classified as loans and receivables. Receivables are initially recognised at fair value and are subsequently stated at amortised cost using the effective interest method, subject to reduction for allowances for estimated irrecoverable amounts. A provision for impairment of receivables is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of those receivables. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, and is recognised in the income statement. For interest-bearing assets, the carrying value includes accrued interest receivable.

Non-derivative financial liabilities are classified as loans and payables. Payables are initially recognised at fair value and are subsequently stated at amortised cost using the effective interest method. For borrowings, the carrying value includes accrued interest payable.

Cash and cash equivalents include cash in hand and deposits held on call, together with other short-term highly liquid investments.

TREASURY SHARES When the Company purchases its own equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes), is deducted from equity until the shares are reissued or disposed of. When such shares are subsequently sold or reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, increases shareholders’ funds. When such shares are cancelled they are transferred to the capital redemption reserve.

II DIVIDENDS DISTRIBUTIONS TO ORDINARY EQUITY HOLDERS £ million 2016 2015 2014 Paid interim of 47.0 pence per share (2015: 91.9p, 2014: 38.8p) – Paid August 2014 – – 370 – Paid June 2015 – 204 – – Paid September 2015 – 204 – – Paid December 2015 – 468 – – Paid June 2016 225 – – – Paid September 2016 225 – – Interim dividend paid 450 876 370 Proposed interim of 54.1 pence per share (2015: nil, 2014: nil) – To be paid December 2016 516 – – Interim dividend proposed 516 – – Proposed final of 54.1 pence per share (2015: 49.1p, 2014: 89.3p) – Paid February 2015 – – 851 – Paid March 2016 – 468 – – To be paid March 2017 516 – – Final dividend 516 468 851 Total ordinary share dividends of 155.2 pence per share (2015: 141.0p, 2014: 128.1p) 1,482 1,344 1,221

The third interim dividend for the year ended 30 September 2016 of 54.1 pence per share amounts to a proposed dividend of £516 million, which will be paid in December 2016.

The proposed final dividend for the year ended 30 September 2016 of 54.1 pence per share amounts to a proposed dividend payment of £516 million in March 2017 based on the number of shares ranking for dividend at 30 September 2016, and is subject to shareholder approval. If approved, the total dividend paid in respect of 2016 will be £1,482 million (2015: £1,344 million). The dividend paid during 2016 is £1,386 million (2015: £1,259 million).

III INVESTMENTS COST OF SHARES IN IMPERIAL TOBACCO HOLDINGS (2007) LIMITED £ million 2016 2015 At 1 October 7,968 7,968 At 30 September 7,968 7,968

The Directors believe that the carrying value of the investments is supported by their underlying net assets.

A list of the subsidiaries of the Company is shown on pages 126 to 133.

IV DEBTORS £ million 2016 2015 Amounts owed from Group undertakings 9,063 67

Amounts owed from Group undertakings are unsecured, interest bearing, have no fixed date for repayment and are repayable on demand.

124 Imperial Brands Brands PLC | Annual | Annual Report Report and and Accounts Accounts 20162016 OVERVIEW

V CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR £ million 2016 2015 Cash at bank and in hand 1 1 STRATEGY

VI CALLED UP SHARE CAPITAL £ million 2016 2015 Authorised, issued and fully paid 1,036,000,000 ordinary shares of 10p each (2015: 1,036,000,000) 104 104

VII RESERVES PERFORMANCE As permitted by section 408(3) of the Companies Act 2006, the profit and loss account of the Company is not presented. The profit attributable to shareholders, dealt with in the financial statements of the Company, is £10,382 million (2015: £1,489 million). This is after charging an audit fee of £0.9 million (2015: £0.9 million).

TREASURY SHARES Shares purchased under the Group’s buyback programme are normally held in a separate treasury reserve and represent a deduction from equity shareholders’ funds, and are only cancelled if the number of treasury shares approaches 10 percent of issued share capital. During the

year the Group purchased no shares (2015: nil) and cancelled no shares (2015: nil). GOVERNANCE

Millions of shares 2016 2015 At 1 October 78.9 78.9 Gifted to Employee Share Ownership Trusts (1.6) – At 30 September 77.3 78.9 Percentage of issued share capital 7.5 7.6

VIII GUARANTEES FINANCIALS Imperial Brands PLC has guaranteed various borrowings and liabilities of certain UK and overseas subsidiary undertakings, including various Dutch and Irish subsidiaries. At 30 September 2016, the contingent liability totalled £18,138 million (2015: £14,123 million).

The guarantees include the Dutch subsidiaries, all of which are included in the consolidated financial statements as at 30 September 2016 and which, in accordance with Book 2, Article 403 of The Netherlands Civil Code, do not file separate financial statements with the Chamber of Commerce. Under the same article, Imperial Brands PLC has issued declarations to assume any and all liabilities for any and all debts of the Dutch subsidiaries.

The guarantees also cover the Irish subsidiaries, all of which are included in the consolidated financial statements as at 30 September 2016. The Irish companies, namely John Player & Sons Limited and Imperial Tobacco Mullingar, have therefore availed themselves of the exemption provided by section 17 of the Irish Companies (Amendment) Act 1986 in respect of documents required to be attached to the annual returns for such companies.

The Directors have assessed the fair value of the above guarantees and do not consider them to be material. They have therefore not been recognised on the balance sheet.

IX RELATED PARTY DISCLOSURES Details of Directors’ emoluments and interests are provided within the Directors’ Remuneration Report. The Directors Remuneration Report, on pages 51-73 includes details on salary, benefits, pension and share plans. These disclosures form part of the financial statements.

X FIRST-TIME ADOPTION OF FRS 101 This is the first year in respect of which the Company has prepared its financial statements under FRS 101. The previous financial statements for the year ended 30 September 2015 were prepared under ‘old UK GAAP’. The date of transition to FRS 101 for the Company is 1 October 2014. Set out below are descriptions of the various implementation options applied by the Company in preparing the financial statements for the year ending 30 September 2016, as well as reconciliations from ‘old UK GAAP’ to FRS 101 for both total comprehensive income for the year ended 30 September 2015 and total equity as at 1 October 2014 and 30 September 2015.

MANDATORY EXCEPTIONS TO RETROSPECTIVE APPLICATION Mandatory exceptions to retrospective application in IFRS 1 applied in converting from ‘old UK GAAP’ to FRS 101 are in respect of exception for estimates – estimates made as at 1 October 2014 under FRS 101 are consistent with those made previously under ‘old UK GAAP’.

RECONCILIATION OF TOTAL COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 SEPTEMBER 2015, AND TOTAL EQUITY AT 1 OCTOBER 2014 AND 30 SEPTEMBER 2015 The transition from ‘old UK GAAP’ to FRS 101 has resulted in no change to the reported total comprehensive income for the year ended 30 September 2015, nor to total equity as at 1 October 2014 or 30 September 2015.

www.imperialbrandsplc.comwww.imperialbrandsplc.com 125 RELATED UNDERTAKINGS

In accordance with Section 409 of the Companies Act 2006 a full list of subsidiaries, partnerships, associates, and joint ventures, the principal activity, the country of incorporation and the effective percentage of equity owned, as at 30 September 2016 are disclosed below. With the exception of Imperial Tobacco Holdings (2007) Limited, which is wholly owned by the Company, none of the shares in the subsidiaries is held directly by the Company.

SUBSIDIARIES: REGISTERED IN ENGLAND AND WALES, WHOLLY OWNED Name Principal activity Attendfriend Limited Dormant British Tobacco Company Limited Dormant Congar International UK Limited Dormant Fontem UK Limited In liquidation Imperial Brands Enterprise Finance Limited Provision of treasury services to other Group companies Imperial Brands Finance PLC Provision of treasury services to other Group companies Imperial Investments Limited Dormant Imperial Tobacco Altadis Limited Provision of finance to other Group companies Imperial Tobacco Capital Assets (1) Provision of finance to other Group companies Imperial Tobacco Capital Assets (2) Provision of finance to other Group companies Imperial Tobacco Capital Assets (3) Provision of finance to other Group companies Imperial Tobacco Capital Assets (4) Provision of finance to other Group companies Imperial Tobacco Group Limited Dormant Imperial Tobacco Holdings (1) Limited (iv) Holding investments in subsidiary companies Imperial Tobacco Holdings (2007) Limited (iv) Holding investments in subsidiary companies Imperial Tobacco Holdings Limited Holding investments in subsidiary companies Imperial Tobacco Initiatives Provision of finance to other Group companies Imperial Tobacco International Limited Export and marketing of tobacco products Imperial Tobacco Lacroix Limited Provision of finance to other Group companies Imperial Tobacco Limited Manufacture, marketing and sale of tobacco products in the UK Imperial Tobacco Overseas (Polska) Limited Holding investments in subsidiary companies Imperial Tobacco Overseas Holdings (1) Limited (viii) Holding investments in subsidiary companies Imperial Tobacco Overseas Holdings (2) Limited Holding investments in subsidiary companies Imperial Tobacco Overseas Holdings (3) Limited Holding investments in subsidiary companies Imperial Tobacco Overseas Holdings Limited Holding investments in subsidiary companies Imperial Tobacco Overseas Limited (x) Holding investments in subsidiary companies Imperial Tobacco Pension Trustees (Burlington House) Limited Dormant Imperial Tobacco Pension Trustees Limited (iv) Dormant ITG Brands Limited Holding investments in subsidiary companies Joseph & Henry Wilson Limited Licencing rights for the manufacture and sale of tobacco products La Flor de Copan UK Limited Holding investments in subsidiary companies Park Lane Tobacco Company Limited Dormant Rizla UK Limited Entity ceased trading Sinclair Collis Limited (iv) Distributor of tobacco products in England, Scotland and Wales Tabacalera de Garcia UK Limited Holding investments in subsidiary companies

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SUBSIDIARIES: INCORPORATED OVERSEAS, WHOLLY OWNED Name Country of incorporation Principal activity 800 JR Cigar Inc United States of America Holding investments in subsidiary companies STRATEGY Altadis Canarias SAU (ii) Spain Marketing and sale of tobacco products in the Canary Islands Altadis Emisiones Financieras SAU Spain Provision of finance to Altadis SA and its subsidiaries Altadis Holdings USA Inc United States of America Holding investments in subsidiary companies Altadis Luxembourg SA Luxembourg Holding investments in subsidiary companies Altadis Management Services Corporation United States of America Trademark service company Altadis Mayotte SAS France, Mayotte Island Sales and distribution of tobacco products in Mayotte Island Altadis Middle East FZCO United Arab Emirates Sales and marketing of tobacco products in the Middle East

Altadis Ocean Indien SAS France (La Reunion Island) Sales and distribution of tobacco products in la Reunion Island PERFORMANCE Altadis Retail Corporation United States of America Trademark owner Altadis S.A.U. Spain Manufacture, sales and distribution of tobacco products in Spain Altadis Shade Company LLC United States of America Manufacture and sale of tobacco products in the USA Altadis USA Inc United States of America Manufacture and sale of cigars in the USA Association pour la Recherche sur les Nicotianées (ARN) France Research and development Athena IP Vermogensverwaltungs GmbH Germany Davidoff cigarette trademark owner Badische Tabakmanufaktur Roth-Händle GmbH Germany Trademark owner

Cacique, SA – Comércio, Importaçao e Exportaçao Brazil Dormant GOVERNANCE Casa Blanca Inc United States of America Restaurant Casa de Montecristo Inc United States of America Retail Casa de Montecristo TN LLC United States of America Retail Casa de Montecristo TX LLC United States of America Retail CBHC Inc United States of America Dormant Cigar Savor Enterprises LLC United States of America Manufacture of tobacco products Commonwealth Brands Inc United States of America Manufacture and sale of tobacco products in the USA

Commonwealth-Altadis, Inc United States of America Sales and distribution of tobacco products in the USA FINANCIALS Congar International Corp (Delaware) United States of America Manufacturing and distribution of mass market cigars Conneticut Shade Corporation United States of America Holding investments in subsidiary companies Consolidated Cigar Holdings Inc (vii) United States of America Holding investments in subsidiary companies Coralma International SAS France Holding investments in subsidiary companies Cuban Cigar Brands BV (v) Netherlands Antilles Trademark owner Direct Products Inc (Inactive) United States of America Holding investments in subsidiary companies Dunkerquoise des Blends SAS France Tobacco processing East Side Cigar, Inc United States of America Production and distribution of cigars Ets L Lacroix Fils NV/SA Belgium Manufacture and sale of tobacco products in Belgium Fontem (Beijing) Technology Solutions Limited (i) People’s Republic of China Research and development Fontem Holdings 1 B.V. The Netherlands Holding investments in subsidiary companies Fontem Holdings 2 B.V. The Netherlands Holding investments in subsidiary companies Fontem Holdings 3 B.V. The Netherlands Holding investments in subsidiary companies Fontem Holdings 4 B.V. The Netherlands Holding investments in subsidiary companies Fontem Holdings B.V. The Netherlands Holding investments in subsidiary companies Fontem International GmbH Germany Holding investments in subsidiary companies Fontem US, Inc. United States of America Sales and marketing of tobacco products in the US Fontem Ventures B.V. The Netherlands Holding investments in subsidiary companies Gauloises Inc. United States of America In liquidation Huotraco International Limited Cambodia Production and marketing of tobacco products Imperial Brands Finance France SAS France Provision of finance to other Group companies Imperial Nominees Limited (ii) New Zealand Trustee Company Imperial Tobacco (Asia) Pte. Ltd., Singapore Trading of tobacco related products Imperial Tobacco (Beijing) Limited (i) People’s Republic of China In liquidation Imperial Tobacco Australia Holdings B.V. The Netherlands Holding investments in subsidiary companies Imperial Tobacco Australia Limited Australia Sales and marketing of tobacco products in Australia Imperial Tobacco Austria Marketing Service GmbH Austria Marketing of tobacco products in Austria Imperial Tobacco BH doo (i) Bosnia-Herzegovina Marketing and distribution of tobacco products in Bosnia Imperial Tobacco Brasil Comércio de Produtos Brazil Co-ordinating and monitoring of WEST license productions and de Tabaco Ltda. distribution of tobacco products Imperial Tobacco Bulgaria EOOD (i) Bulgaria Manufacture and sale of tobacco products in Bulgaria

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SUBSIDIARIES: INCORPORATED OVERSEAS, WHOLLY OWNED CONTINUED

Name Country of incorporation Principal activity Imperial Tobacco China Limited (i) People’s Republic of China In liquidation Imperial Tobacco CR s.r.o. Czech Republic Sales and marketing of tobacco products in the Czech Republic Imperial Tobacco Denmark ApS Denmark Distribution of tobacco products in Denmark and Greenland Imperial Tobacco Distribution EOOD (i) Bulgaria Marketing and distribution of tobacco products in Bulgaria Imperial Tobacco Distribution Romania srl Romania Marketing and distribution of tobacco products in Romania Imperial Tobacco EFKA Management GmbH Germany Manufacture of tobacco products in Germany Imperial Tobacco España, S.L.U. Spain Holding investments in subsidiary companies Imperial Tobacco Estonia OÜ Estonia Sales of tobacco products Imperial Tobacco Finland Oy Finland Sales and marketing of tobacco products in Finland Imperial Tobacco Germany Finance GmbH Germany Holding investments in subsidiary companies Imperial Tobacco Hellas S.A. Greece Sales and marketing of tobacco products in Greece Imperial Tobacco Holdings (Netherlands) B.V. The Netherlands Provision of finance to other Group companies Imperial Tobacco Holdings International B.V. The Netherlands Provision of finance to other Group companies Imperial Tobacco Ireland Unlimited Company (v) Ireland Provision of finance to other Group companies Imperial Tobacco Italia S.r.l. Italy Sales and marketing of tobacco products in Italy Imperial Tobacco Italy S.r.l., Italy Holding investments in subsidiary companies Imperial Tobacco Japan Kabushiki Kaisha Japan Sales and marketing of tobacco products in Japan Imperial Tobacco Kyrgyzstan LLC (i) Kyrgyzstan Marketing and distribution of tobacco products in Kyrgyzstan Imperial Tobacco Magyarország Dohányforgalmázo Kft Hungary Sales and marketing of tobacco products in Hungary (Imperial Tobacco Hungary) Imperial Tobacco Management (1) Limited Guernsey Holding investments in subsidiary companies Imperial Tobacco Management (2) Limited Guernsey Holding investments in subsidiary companies Imperial Tobacco Management Luxembourg (3) sarl Luxembourg Holding investments in subsidiary companies Imperial Tobacco Marketing Sdn Bhd Malaysia Trading of tobacco products Imperial Tobacco Mullingar Unlimited Company Ireland Manufacture of fine cut tobacco in the Republic of Ireland Imperial Tobacco New Zealand Limited New Zealand Manufacture and sale of tobacco products in New Zealand Imperial Tobacco Norway AS Norway Sales and marketing of tobacco products in Norway Imperial Tobacco Polska Manufacturing SA Poland Manufacture of tobacco porducts in Poland Imperial Tobacco Polska S.A. Poland Manufacture and sale of tobacco products in Poland Imperial Tobacco Portugal SSPLC Portugal Advertising and support management Imperial Tobacco Sales & Marketing LLC Russia Sales and marketing of tobacco products in Russia Imperial Tobacco SCG doo Beograd (i) Serbia Marketing and distribution of tobacco products in Serbia Imperial Tobacco Sigara ve Tutunculuck Sanayi Turkey Manufacture of tobacco products in Turkey Ve Ticaret A.S. Imperial Tobacco Slovakia a.s. Slovak Republic Sales and marketing of tobacco products in the Slovak Republic Imperial Tobacco South Africa S.A. Panama Provision of services to other Group companies Imperial Tobacco Taiwan Co Limited Taiwan Sales and marketing of tobacco products in Taiwan Imperial Tobacco Taiwan Manufacturing Company Taiwan Manufacture of tobacco products in Taiwan Limited Imperial Tobacco Tutun Urunleri Satis Ve Pazarlama A.S. Turkey Sales and marketing of tobacco products in Turkey Imperial Tobacco Ukraine (i) Ukraine Sales and marketing of tobacco products un Ukraine Imperial Tobacco US Holdings BV The Netherlands Holding investments in subsidiary companies Imperial Tobacco Volga LLC (i) Russia Manufacture of tobacco products in Russia Imperial Tobacco West Africa SAS (i) Cote D’Ivoire Holding investments in subsidiary companies Imperial Tobacco Yaroslavl CJSC (i) Russia Manufacture of tobacco products in Russia Imperial Tobacco Zagreb doo (i) Croatia Marketing and distribution of tobacco related products in Croatia IMPTOB South Africa (Pty) Limited South Africa Manufacture of tobacco products in South Africa International Marketing Promotional Services Limited Nigeria Sales and marketing and of tobacco products in Nigeria ITB Corporation Limited Bahamas Trademark owner ITG Brands Holdco LLC United States of America Holding investments in subsidiary companies ITG Brands, LLC United States of America Marketing and distribution of tobacco products in the USA ITG Holdings USA Inc (ix) United States of America Holding investments in subsidiary companies ITI Cigars SL Spain Holding investments in subsidiary companies ITL Pacific (HK) Limited Hong Kong Manufacture and sale of tobacco and tobacco related products J & R Tobacco (New Jersey) Corp United States of America Sales of tobacco and tobacco related products JAW-Invest Oy Finland Trademark owner John Player & Sons Limited Ireland Sales and marketing of tobacco products in the Republic of Ireland John Player Ireland Pension Trustee Limited Ireland Trustee Company

128 Imperial Brands Brands PLC | Annual | Annual Report Report and and Accounts Accounts 20162016 OVERVIEW

SUBSIDIARIES: INCORPORATED OVERSEAS, WHOLLY OWNED Name Country of incorporation Principal activity JR Cigar (DC) Inc United States of America Sales of tobacco and tobacco related products STRATEGY JR Cigars.com, Inc. United States of America Sales of tobacco and tobacco related products JR Mooresville, Inc United States of America Sales of tobacco and tobacco related products JR Tobacco NC, Inc United States of America Sales of tobacco and tobacco related products JR Tobacco of America Inc United States of America Sales of tobacco and tobacco related products JR Tobacco of Burlington Inc United States of America Sales of tobacco and tobacco related products JR Tobacco of Michigan Inc United States of America Sales of tobacco and tobacco related products JR Tobacco Outlet Inc United States of America Sales of tobacco and tobacco related products

JSNM SARL France Trademark owner PERFORMANCE La Flor de Copan SAS France Manufacture of cigars in Honduras Los Olvidados SRL Dominican Republic Manufacture and distribution of cigars Max Rohr, Inc United States of America Trademark owner MC Management, Inc. United States of America Provision of services to other Group companies Meccarillos France, SA Luxembourg Holding investments in subsidiary companies Meccarillos International, SA Luxembourg Holding investments in subsidiary companies Meccarillos Suisse, SA Luxembourg Holding investments in subsidiary companies

Midtown Cigar, Inc. United States of America Sales of tobacco and tobacco related products GOVERNANCE Millennium Tobacco Ireland Provision of finance to other Group companies Newglade International Unlimited Company Ireland Provision of finance to other Group companies Phillppine Bobbin Corporation Philippines Manufacture of tobacco related products PT Reemtsma Indonesia Indonesia In liquidation Real Club de Golf la Herrería S.A. Spain Management of golf course REEMARK Gesellschaft für Markenkooperation mbH Germany Dormant Reemtsma Cigarettenfabriken GmbH Germany Manufacture and sale of tobacco products in Germany

Reemtsma Mexico SA de CV IL Mexico In liquidation FINANCIALS Rizla International B.V. The Netherlands Holding investments in subsidiary companies Robert Burton Associates Limited United States of America Marketing of papers in the US Santa Clara Inc United States of America Distribution of cigars Seita Participations SAS France Holding investments in subsidiary companies Seita Senegal Sarl Senegal Dormant Skruf Snus AB Sweden Manufacture, marketing, sales of tobacco products in Sweden Société Centrafricaine de Cigarettes SA (i) Central African Republic Manufacture and distribution of cigarettes in Central African Republic Société Centrafricaine de Distribution Sarl (i) Central African Republic Dormant Société du Mont Nimba Sarl (i) Guinee Conakry Dormant Société Nationale d’Exploitation Industrielle des Tabacs et France Manufacture and sale of tobacco products in France, and export of Allumettes SAS (SEITA) tobacco products Société pour le Développement du Tabac en Afrique SAS France Purchasing company System Designed to Africa Sarl Morocco Distribution of tobacco products Tabacalera Brands Inc United States of America Trademark owner Tabacalera Brands SLU Spain Holding investments in subsidiary companies Tabacalera de Garcia Limited Bermuda Holding investments in subsidiary companies Tabacalera de Garcia SAS France Manufacture of cigars in the Dominican Republic Tabacalera SLU Spain Holding investments in subsidiary companies Tabacalera USA Inc United States of America Holding investments in subsidiary companies Tahiti Tabacs SASU France, Papeete (Tahiti) Distribution of tobacco products in Denmark and Greenland Tobacco Products Fulfillment, Inc. United States of America Fulfilment services Tobaccor SAS (v) France Holding investments in subsidiary companies Tobačna 3DVA, trgovsko podjetje, d.o.o. Slovenia Retail of products in Slovenia Tobačna Grosist d.o.o. Slovenia Marketing and distribution in Slovenia Tobačna Ljubljana d.o.o. (v) Slovenia Sales and marketing tobacco products in Slovenia Tobamark International SA France Trademark owner Urex Inversiones SA Spain Holding investments in subsidiary companies Van Nelle Canada Limited (vii) Canada Import and distribution of tobacco and tobacco related products in Canada Van Nelle Tabak Nederland B.V. (x) The Netherlands Manufacture and sale of tobacco products in the Netherlands Van Nelle Tobacco International Holdings B.V. The Netherlands Sale of tobacco and tobacco related products West Park Tobacco Inc. United States of America Purchase company for USA tobaccos

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SUBSIDIARIES: INCORPORATED OVERSEAS, PARTLY OWNED CONTINUED Percentage Name Country of incorporation Principal activity owned Be To Be Pharma, S.L Spain Distribution of pharmaceuticals 70.0 Caribbean Investment Corporation, SA (i) Switzerland Dormant 50.0 CDM Tampa, LLC United States of America Retail 50.0 Comercial Iberoamericana SA (i) Spain Wholesale and distribution of tobacco products 50.0 Compagnie Agricole et Industrielle des Tabacs France Management company 99.9 Africains SAS Compagnie Agricole et Industrielle des Tabacs de Cote D’Ivoire In liquidation 74.6 Cote D’Ivoire SA, IL (i) Compagnie Réunionnaise des Tabacs SAS France, St Pierre (La Manufacture of cigarettes 98.6 Reunion Island) Compañía de Distribución Integral de Spain Distribution of published materials and other products 70.0 Publicaciones Logista SLU (iv) Compañía de Distribución Integral Logista Spain Holding investments in subsidiary companies 70.0 Holdings, S.A. (iii) Compañía de Distribución Integral Logista Poland Distribution of tobacco products in Poland 70.0 Polska, sp. Z o.o. (SL) Compañía de Distribución Integral Logista S.A.U. Spain Distribution of tobacco products in Spain 70.0 Coprova SAS (i) France Distribution of Cuban cigars in the Caribbean 50.0 Cuba Cigar, S.L. (i) Spain Distribution of Cuban cigars in the Canary Islands 50.0

Cubacigar (Benelux) N.V. (i) Belgium Distribution of cigars in Belgium 50.0 Cyberpoint, S.L.U. Spain Distribution of POS software 70.0 Dalso, S.R.L. (i) Dominican Republic Distribution of Cuban cigars in Republic Dominican 50.0 Distribérica SA Spain Holding investments in subsidiary companies 70.0 Distribución de Publicaciones Siglo XXI, Spain Distribution of published materials and other products in Spain 56.0 Guadalajara Distribuidora de Ediciones SADE, SAU Spain Distribution of published materials and other products in Spain 70.0 Distribuidora de las Rias SA Spain Distribution of published materials and other products in Spain 70.0 Distribuidora del Este S.A.U. Spain Distribution of published materials and other products in Spain 70.0 Distribuidora del Noroeste SL Spain Distribution of published materials and other products in Spain 70.0 Dronas 2002, SLU Spain Industrial parcel and express delivery service 70.0 Empor – Importação e exportação, SA (i) Portugal Distribution of tobacco products in Portugal 50.0 Gauloises (Pty) Limited IL South Africa In liquidation 50.0 Habanos Nordic AB (i) Sweden Distribution of Cuban cigars in Scandinavia 50.0 Imperial Tobacco Production Ukraine (i) Ukraine Manufacture of tobacco products in Ukraine 99.9 Imperial Tobacco TKS a.d. (i) Macedonia Manufacture, marketing and distribution of tobacco products 99.1 in Macedonia Imperial Tobacco TKS a.d. – Dege Kosove Kosovo Manufacture, marketing and distribution of tobacco products 99.1 in Kosovo Imprimerie Industrielle Ivoirienne SA (i) Cote D’Ivoire Printing company 72.8 Infifon APS (i) Denmark Holding investments in subsidiary companies 50.0 Infifon Hong Kong Limited (i) China Distribution of Cuban cigars in China 50.0 Infifon I, BV (i) The Netherlands Holding investments in subsidiary companies 50.0 Infifon II NV (i) Netherlands Antilles Distribution of Cuban cigars in Russia 50.0 ITB Corporation y Cía., S.R.C. Spain Trademark owner 86.7 La Mancha 2000, S.A., Sociedad Unipersonal Spain Logistics services 70.0 Lao Tobacco Limited (i) Laos Manufacture and distribution of cigarettes in Laos 53.0 Logesta Deutschland Gmbh, Sociedad Germany Long haul transportation in Germany 70.0 Unipersonal Logesta France SARL France Long haul transportation in France 70.0 Logesta Gestión de Transporte SAU Spain Long haul transportation services in Spain 70.0 Logesta Italia, S.R.L., Sociedad Unipersonal Italy Long haul transportation in Italy 70.0 Logesta Lusa LDA Portugal Long haul transportation in Portugal 70.0 Logesta Maroc SA IL Morocco In liquidation 89.8 Logesta Polska Sp Zoo Poland Long haul transportation in Poland 70.0 Logista France Holding SA France Holding investments in subsidiary companies 70.0 Logista France SAS France Holding investments in subsidiary companies 70.0 Logista Italia Spa Italy Long haul transportation in Italy 70.0 Logista Pharma SA Spain Distribution of pharmaceuticals 70.0 Logista Promotion et Transport SAS France Marketing and distribution of tobacco products in France 70.0 Logista, Transportes, Transitários e Pharma, Lda., Portugal Industrial parcel delivery and pharmaceutical logistics in Portugal 70.0 Sociedad Unipersonal Logista-Dis SAU Spain Sale of tobacco products in Spain 70.0

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SUBSIDIARIES: INCORPORATED OVERSEAS, PARTLY OWNED Percentage Name Country of incorporation Principal activity owned

MABUCIG (Manufacture Burkinabe de Cigarette) Burkina Faso Manufacture of cigarettes in Burkina Faso 72.7 STRATEGY Macotab SAS (Manufacture Corse des Tabacs) France, Bastia Manufacture and sales of cigarettes 99.9 Manufacture de Cigarettes du Tchad SA Tchad Manufacture and distribution of cigarettes in Chad 95.0 Midsid – Sociedade Portuguesa de Distribução, Portugal Wholesale of tobacco and other products 70.0 S.A., Sociedad Unipersonal MTOA SA (i) Senegal Manufacture and sales of cigarettes in Senegal 97.3 NITAF Limited, IL (i) Nigeria In liquidation 50.0 Promotora Vascongada de Distribuciones SA Spain Distribution of published materials and other products in Biscay 70.0

and Santander PERFORMANCE Publicaciones y Libros SA Spain Publishing company 70.0 Puro Tabaco SA (i) Argentina Distribution of Cuban cigars in Argentina and Chile 50.0 Reemtsma Kyrgyzstan OJSC (i) Kyrgyzstan Manufacture and sale of tobacco products in Kyrgyzstan 98.6 S3T Pte Ltd (i) Singapore Holding investments in subsidiary companies 51.0 SACIMEM SA (i) Madagascar Manufacture of cigarettes in Madagascar 65.4 SITAB Industries SA (i) Cote D’Ivoire Manufacture of cigarettes in Cote D’Ivoire 80.5 SITAR Holding SAS France (La Reunion Holding investments in subsidiary companies 98.6

Island) GOVERNANCE Société Africaine d’Impression Industrielle SA (i) Senegal Manufacture and distribution of cigarettes in Senegal 99.8 Société Allumettiere Française SAS France Manufacture and distribution of cigarettes 70.0 Société de Distribution Sénégalaise SA (i) Senegal In liquidation 97.5 Société des Cigarettes Gabonaises SA (i) Gabon In liquidation 87.8 Société Industrielle et Agricole du Tabac Congo Manufacture and distribution of cigarettes in Congo 89.7 Tropical SA (i) Société Ivoirienne des Tabacs SA (i) (iii) Cote D’Ivoire Manufacture and distribution of cigarettes in Ivory Coast 74.1

Société Marocaine des Tabacs SA Morocco Manufacture and distribution of cigarettes in Morocco 99.9 FINANCIALS SOCTAM SA (i) Madagascar Manufacture and distribution of cigarettes in Mali 50.5 Supergroup SAS France Wholesale of tobacco products 70.0 T2 Gran Canaria SA Spain Pharmaceutical products logistics in Canary Islands 70.0 Top Cigars Corporation LLC (i) Russia Distributor of Habanos in Russia 50.0 Universal Brands, S.A. Spain Trademark owner 86.7 Xinet SA (i) Uruguay Distribution of Cuban cigars in Uruguay 50.0

ASSOCIATES: REGISTERED IN ENGLAND AND WALES Percentage Name Principal activity owned C H (Downton) Limited (ix) Dormant 25.0 F J (Dowton) Limited Dormant 25.0 Hunters & Frankau Limited Dormant 25.0 Incentive Marketing Services (UK) Limited Dormant 25.0 Jacon Financial Services Limited (ix) Dormant 25.0 Joseph Samuel & Son Limited Dormant 25.0 Knight Brothers Cigar Shippers Limited Dormant 25.0 Lancha House Limited Dormant 25.0 Melbourne Hart & Company Limited Dormant 25.0 Melbourne Hart Holdings Limited (ix) Dormant 25.0 Morris & Morris Limited Dormant 25.0 Tabaco Torcido Traders Limited Dormant 25.0 The English Import Company Limited Dormant 25.0 Tropic Tobacco Company Limited Dormant 25.0

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ASSOCIATES: INCORPORATED OVERSEAS Country of incorporation Percentage Name Principal activity owned 5th Avenue Products Trading GmbH (i) (iv) Germany Distribution of Cuban cigars in Germany 27.5

Avanza Libros S.L.U., Sociedad Unipersonal,IL Spain In liquidation 35.0 Azur Finances SA Cameroon Holding investments in subsidiary companies 20.0 Caribbean Cigars Corporation NV (i) Curacao Distribution of Cuban cigars in the Caribbean 25.0 Compañia Española de Tabaco en Rama SA Spain Production and sale of raw tobacco 20.8 (Cetarsa) (i) Diadema Spa (i) Italy Distribution of Cuban cigars in Italy 30.0 Distribuidora de Publicaciones del Sur, S.A. Spain Distribution of published materials and other products 35.0 Distribuidora Valenciana de Ediciones S.A. Spain Distribution of published materials and other products in Valencia 35.0 Entreprises des Tabacs en Guinée (i) Guinée Conakry Dormant 34.0 Havana House Cuban Products Specialist New Zealand Distribution of Cuban cigars in New Zealand 25.0 Limited (i) Havana House Limited (i) Canada Distribution of Cuban cigars in Canada 25.0 Importadora y Exportadora de Puros y Tabacos Mexico Marketing and distribution of Cuban cigars in Mexico 25.0 SA DE CV (IEPT) (i) Intertabak AG (i) Switzerland Distribution of Cuban cigars in Switzerland and Liechtenstein 25.0 Lippoel Tobacco Corporation International NV Netherlands Antilles Distributor of Cuban leaf 27.5 Logista Libros SL Spain Distribution of books 35.0 Manufacture Mauritanienne des Tabacs Mauritanie Manufacture and import of tobacco products 34.6 Maori Tabacs, S.A. (i) Andorra Distribution of Cuban cigars in Andorra 25.0 Marfany I Mas Industria Tobacco SA (Mitsa) Andorra Manufacture of Cuban cigars in Andorra 24.0 (MARFANY MAS INDUSTRIA TABAQUERA, S.A.) New Mentality Limited (i) British Virgin Islands Dormant 25.0 Pacific Holding (Thailand) Company Limited (i) (vi) Thailand Holding investments in subsidiary companies 25.0 Phoenicia Beirut SAL (i) Lebanon Retail in Lebanon 25.0 Phoenicia TAA Cyprus Ltd (i) Cyprus Distribution of Cuban cigars in the Middle East and Africa 25.0 Pit Stop Limited (i) British Virgin Islands Dormant 25.0 Promotion et Distribution a Madagascar (i) Madagascar Distribution of cigarettes in Madagascar 33.4 SITABAC S.A, Cameroon Manufacture and distribution of tobacco products in Cameroon 34.5 Société Internationale des Tabacs Malgaches (i) Madagascar Leaf processing 47.9 Société Nationale des Tabacs et Allumettes du Mali Manufacture and distribution of cigarettes in Mali 28.0 Mali SA (i) Terzia SPA Italy Wholesale to tobacconists in Italy 47.6 The Pacific Cigar (Thailand) Co Limited (i) (vii) Thailand Distribution of Cuban cigars in Thailand 25.0 The Pacific Cigar Co. (Singapore) Pte Limited (i) Singapore Australia Distribution of Cuban cigars in Singapore 25.0 The Pacific Cigar Company (Australia) Pty Australia Distribution of Cuban cigars in Australia 25.0 Limited (i) The Pacific Cigar Company (Macau) Limited (i) Macau Distribution of Cuban cigars in Macau 25.0 The Pacific Cigar Company (Malaysia) SDN BHD (i) Malaysia Dormant 25.0 The Pacific Cigar Company (New Zealand) New Zealand Distribution of Cuban cigars in New Zealand 25.0 Limited (i) The Pacific Cigar Company Limited (i) China Distribution of Cuban cigars in Asia 25.0 The Pacific Cigar International Co Limited (i) Taiwan Distribution of Cuban cigars in Asia 25.0

JOINT VENTURES: INCORPORATED OVERSEAS Percentage Name Country of incorporation Principal activity owned Altabana SL (i) Spain Holding investments in subsidiary companies involved in the 50.0 marketing and sale of Cuban cigars Corporación Habanos SA (i) Cuba Export of cigars manufactured in Cuba 50.0 International Cubana de Tabaco SA (i) Cuba Manufacture of cigarillos in Cuba 50.0 Intertab SA (i) Switzerland Holding investments in subsidiary companies 50.0 NITAF Holding BV, IL (iv) The Netherlands In liquidation 50.0 Promotora de Cigarros SL (i) Spain Sales and marketing of cigars manufactured in Cuba 50.0 West Tobacco Pte Ltd (i) Singapore Dormant 50.0 Compañía de Distribución Integral Logista S.A.U. Spain Services and distribution 35.0 y GTECH Global Lottery, S.L.U., U.T.E.

132 Imperial Brands Brands PLC | Annual | Annual Report Report and and Accounts Accounts 20162016 OVERVIEW

PARTNERSHIPS The Group also owns the following partnerships:

Name Country Principal activity STRATEGY Fabrica de Tabacos La Flor de Copan S de R.L. de CV Honduras Holding investments in subsidiary companies Principal place of business: Apartado Postal 209, Colonia Mejia-García, Santa Rosa de Copán, Honduras Imperial Tobacco (Efka) GmbH & Co. KG Germany Manufacture of tubs in Germany Principal place of business: Industriestrasse 6, Postfach 1257, D-78636 Trossingen, Germany Imperial Tobacco Kazakhstan LLP (i) Kazakhstan Marketing and distribution of tobacco products in Kazakhstan Principal place of business: 3rd Floor, Prime Business Park, 100/2 Furmanov Str, Medeuskiy District, Almaty, 050000, Kazakhstan PERFORMANCE ITG Brands Holdpartner LP United States of America Marketing and sale of tobacco products in United States of America Principal place of business: 714 Green Valley Road, Greensboro, NC27408, United States of America

The subsidiaries listed were held throughout the year and the consolidated Group financial statements include all the subsidiary undertakings identified. All dormant UK entities have taken the exemption available to not have an audit of their financial statements.

Unless otherwise stated the entities are unlisted, have 1 type of ordinary share capital and a reporting period ending on 30 September each year. GOVERNANCE (i) December year end

(ii) March year end

(iii) Listed entity

(iv) Holding of one type of ordinary share only (where more than one type of share is authorised / in issue). Only applicable to partly owned entities – percentage ownership is shown in the tables above.

(v) Holding of two types of ordinary share (where more than one type of ordinary share is authorised / in issue). Only applicable to 100% owned subsidiaries. FINANCIALS

(vi) Holding of preference shares only

(vii) Holding of ordinary and preference shares

(viii) Holding of ordinary and redeemable shares

(ix) Holding of ordinary and deferred shares

(x) Holding of two types of ordinary share and redeemable shares

The percentage of issued share capital held by the immediate parent and the effective voting rights of the Group are the same except for Imperial Tobacco Italia Srl where the entire share capital, and therefore 100 per cent of the voting rights, are held by a number of Group companies, and Compañía de Distribución Integral Logista SAU, Logista France SAS, and Logista Italia SpA are 100 per cent owned subsidiaries of Compañía de Distribución Integral Logista Holdings SA, which is itself 70 per cent owned by Altadis SAU.

www.imperialbrandsplc.comwww.imperialbrandsplc.com 133 SHAREHOLDER INFORMATION

Registered Office 121 Winterstoke Road Bristol BS3 2LL +44 (0)117 963 6636 Incorporated and domiciled in England and Wales No: 3236483

Registrars Equiniti Limited Aspect House Spencer Road Lancing West Sussex BN99 6DA 0371 384 2037* +44 (0)121 415 7009 0371 384 2255* text phone for shareholders with hearing difficulties

* Lines are open 8:30am to 5:30pm, Monday to Friday excluding UK public holidays.

Shareholder Services for ADR Holders Citibank Shareholder Services PO Box 43077 Providence, RI 02940-3077 USA Toll-free number in the USA: 1-877-CITI-ADR (1-877-248-4237) email: [email protected]

Stockbrokers Credit Suisse International One Cabot Square Canary Wharf London E14 4QJ +44 (0)20 7888 8000

Barclays Bank Plc 5 The North Colonade Canary Wharf London E14 4BB +44 (0)20 7623 2323

Auditors PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors 2 Glass Wharf Bristol BS2 OFR

134 Imperial Brands | Annual Report and Accounts 2016 OVERVIEW

Financial Calendar and Dividends Half-year results are expected to be announced in May 2017 and the full year’s results in November 2017.

The Annual General Meeting of the Company will be held on Wednesday 1 February 2017 at the Bristol Marriott Hotel City Centre. The Notice of Meeting and explanatory notes about the resolutions to be proposed are set out in the circular enclosed with this report. STRATEGY

Dividends are generally paid at the end of March, June, September and December. Payment of the 2016 final dividend, if approved, will be on 31 March 2017 to shareholders on the Register of Members at the close of business on 17 February 2017. The associated ex dividend date will be 16 February 2017.

Shareholders who do not currently mandate their dividends and who wish to do so should complete a mandate instruction form obtainable from our Registrars, Equiniti Limited, at the address shown.

Share Dealing Service PERFORMANCE Our Registrars offer Shareview Dealing, a service which allows you to buy or sell Imperial Brands PLC ordinary shares if you are a UK resident. You can deal on the internet or by phone. Log on to www.shareview.co.uk/dealing or call them on 03456 037 037 between 8.00am and 4.30pm Monday to Friday for more information about this service. If you wish to sell your Imperial Brands PLC ordinary shares, you will need your shareholder reference number which you can find on your share certificate.

Individual Savings Account Investors in Imperial Brands PLC ordinary shares may take advantage of a low cost Individual Savings Account (ISA) and Investment Account where they can hold their Imperial Brands PLC ordinary shares electronically. The ISA and Investment Account are operated

by Equiniti Financial Services Limited. Commission starts from £12.50 and £1.75 respectively for the sale and purchase of shares. GOVERNANCE

For a brochure or to apply for an ISA or Investment Account go online to www.shareview.co.uk/dealing or call Equiniti on 0345 300 0430.

Dividend Reinvestment Plan Imperial Brands PLC has set up a dividend reinvestment plan (DRIP) to enable shareholders to use their cash dividend to buy further Imperial Brands PLC ordinary shares in the market. Further information can be obtained from Equiniti on 0371 384 2268 (+44 (0)121 415 7173) or online at www.shareview.co.uk.

American Depositary Receipt Facility FINANCIALS Imperial Brands PLC ordinary shares are traded on the OTCQX International Premier platform in the form of American Depositary Shares (ADSs) using the symbol ‘IMBBY’. The ADS facility is administered by Citibank, N.A. and enquiries should be directed to them at the address shown.

Website Information on Imperial Brands PLC is available on our website: www.imperialbrandsplc.com

Equiniti also offers a range of shareholder information online. You can access information on your holdings, indicative share prices and dividend details and find practical help on transferring shares or updating your details at www.shareview.co.uk

www.imperialbrandsplc.com 135 136 Imperial Brands | Annual Report and Accounts 2016 Printed by Park Communications. Park is an EMAS certified company and its Environmental Management System is certified to ISO 14001. 100% of the inks used are vegetable oil based, 95% of press chemicals are recycled for further use and, on average 99% of any waste associated with this production will be recycled. This document is printed on Inaset Plus Offset, a paper containing fibre sourced from well managed, responsible, FSC® certified forests. The pulp used in this product is bleached using an elemental chlorine free (ECF) process. Designed and produced by Black Sun Plc. Registered Office Imperial Brands PLC 121 Winterstoke Road Bristol BS3 2LL UK www.imperialbrandsplc.com